H-1Bs: Can I recoup the costs of my visa holders who quit?

Editor’s Note: Nikiann Gray is a member of the Labor and Employment Section of Ward and Smith, P.A.

The H-1B Visa

Within the tech world, the high demand for the H-1B visa granted to foreign nationals with at least a bachelor’s degree in computer science, engineering, pharmacology, clinical research, or other fields of study is well known. It also is well known that currently only 65,000 H-1B visas are available for issuance each year and that this number is far short of the demand from the tech community alone. Bill Gates makes his annual pilgrimage to Washington to testify before Congress on the need to massively increase the number of H-1B visas available, and again this year all the H-1B slots were filled on the first day they became available.

Despite the uncertainty of the cap and the limited duration of stay for H-1B employees, many employers still find their H-1B holders to be invaluable assets and diligently try to obtain new visas. The H-1B process, however, can be expensive. Employers must expend time and money on recruiting the foreign national. At times, the employer must pay international airfare and temporary housing costs. Further, most employers pay an attorney to prepare the H-1B petition and, in addition, pay filing and related fees to the government which, alone, exceed $3,000. The U.S. Department of Labor ("USDOL") considers these costs to be a "business expense" and generally prohibits the employer from passing them on to the H-1B holder.

Early Termination

Unfortunately, in competitive industries it is common for employers to lose high quality employees to bigger and better opportunities. This phenomenon is no different, although perhaps even greater, with respect to H-1B holders. A prospective H-1B employee has to qualify for the visa six months before work commences, and much can happen during that six-month period. Further, a present H-1B visa holder can move to another employer without regard to the visa number cap or the expense of obtaining the visa. This means the new employer can avoid the line for an H-1B holder and the costs of the visa if the holder can be convinced to switch employment.

Departure of visa holders before expiration of the visa often leaves the employer feeling betrayed – after all, the employer spent a good deal of money and effort to obtain the visa for the employee. As a result, employers often seek ways to recoup their visa-related expenses if the holder terminates employment early. Employers see this as no different than recouping the costs paid for additional education of an employee if the employee leaves before a specified period of time after the education is completed.

Reimbursement Penalties Not Permitted

In the past, employers have attempted to obtain reimbursement for H-1B visas and related costs through employment contract provisions which required the holder-employee to reimburse the costs upon early termination. The USDOL has issued regulations ("Regulations") which prohibit employers from requiring the H-1B holder, either directly or indirectly, to pay a penalty for terminating employment before an agreed upon date, and has interpreted cost reimbursement provisions to fall within the category of prohibited penalties. Thus, an employer may not make any deduction from the H-1B holder’s paycheck or otherwise collect such a penalty.

The USDOL’s Administrative Review Board ("Board"), which issues final agency decisions for the Secretary of Labor, addressed this issue in a 2004 enforcement action. In USDOL v. Novinvest, LLC, the Board determined that a company was liable for back wages to three H-1B holders for a $5,000 "investment fee" it recouped from the holders after they left employment after less than a year. The "investment fee" purportedly was used to recoup the up-front investment of hiring, training, and processing the employees. However, the USDOL Board held that the fee was in fact an early termination penalty. The employer failed to prove that the investment fee was an allowable deduction, and the Board concluded that the fee was not authorized or allowed.

The Liquidated Damages Alternative

The statute upon which the Regulations are based prohibits penalties, but makes an express distinction between a "penalty" and "liquidated damages." The Regulations explain that liquidated damages are amounts which (1) are fixed or stipulated by the parties at the inception of the contract and (2) are reasonable approximations or estimates of the anticipated or actual damage caused to one party by the other party’s breach of the contract. Penalties, on the other hand, are not reasonable approximations of such damage. Consequently, while penalties are prohibited, the Regulations permit the employer to receive bona fide liquidated damages from an H-1B holder who leaves employment prior to an agreed-upon date.

The issue of whether a contractual provision constitutes permissible "liquidated damages" or a prohibited "penalty" generally is determined by state law. Consequently, the Regulations broadly define the approach taken by a majority of states, but turn to state law to further define the distinction. North Carolina follows the majority approach to the distinction between liquidated damages and penalties, with liquidated damages being defined as a good-faith effort to estimate, in advance, the actual damages which probably would ensue from a breach, and a penalty being defined as a punishment, the threat of which is designed to prevent the breach. In North Carolina, liquidated damages provisions are enforceable, so long as they are reasonable in amount and cannot be viewed as a penalty.

In order to comply with the Regulations and North Carolina law, the liquidated damages should be the type of damages an employer would suffer if any employee quits early: reimbursement for moving expenses and transportation expenses, reimbursement for any educational expenses, and the costs associated with replacing the employee.

Protective Employment Agreements

Although North Carolina is an employment-at-will state, employers and employees may agree to a definite term of employment and utilize carefully drafted employment agreements to protect themselves. Employers concerned about losing an H-1B holder may want to use such an agreement. Of course, if the employment agreement is for a definite term, employers also are wise to include a mechanism for terminating an unsatisfactory employee earlier, such as a "for cause" termination provision. Finally, in order to protect the employer from damages resulting from a breach of contract by the employee, the employment agreement also may include a carefully drafted liquidated damages provision which addresses in detail the reasonable approximation of the likely damage to the employer if the employee breaches the contract by leaving before the agreement’s expiration.

Conclusion

An employer interested in sponsoring a foreign national for an H-1B visa should not decline to do so simply because of concerns about losing the employee before the expiration of the employee’s visa. Instead, the employer can hire that sought-after employee and protect itself by using an employment agreement with a carefully drafted liquidated damages provision.

© 2008, Ward and Smith, P.A.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.