Retention Agreement

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Retention Agreement

What Is a Retention Agreement?

A Retention Agreement or an employee retention agreement is an agreement by which employers agree to retain their employees, typically in the course of transfer of business. When a business undergoes a restructuring of its assets are being transferred, it wants to protect its key employees and personnel. Sometimes, employees also negotiate for a higher designation. The agreement may also contain a retention bonus, which is an extra amount paid to the employee over and above his regular salary in order to make the offer attractive for him.

Who Are the Parties to a Retention Agreement?

This agreement typically contains two parties:

  1. The Employer
  2. The employee: This would typically cover the employees whom the employer wishes to retain.

What Is the Purpose of a Retention Agreement?

This agreement is created for the following purposes:

  1. Retaining talent: Employers wish to retain the focal talent. This is where a retention agreement comes into the picture.
  2. It helps employees exploring opportunities to move up the hierarchy.
  3. It helps the employer in preserving crucial talent.

Contents of a Retention Agreement

An employee bonus plan template consists of the following terms and conditions:

  • Event triggering retention: The agreement should, in the beginning, mention the event, which is triggering the particular retention agreement.
  • Purpose of retention bonus agreement: The purpose behind the retention contract should also be clearly outlined in the agreement.
  • Term: If the agreement is a fixed-term agreement, then the duration of the same should be mentioned.
  • Retention bonus:  A retention bonus can be a one time bonus or paid in tranches. The duration of the same should be included.
  • Severance payment: Typically, in this agreement, the employee’s contract with the old employer is terminated, and a fresh employment contract is signed with the new employer. Hence, the details of severance payment, the timeline of payment, etc. should be included.
  • Employee benefits: What benefits would an employee receive upon absorption should be mentioned in the agreement.
  • Termination: Options of termination should be available to the employer.
  • Tax: The method of taxation of the retention bonus and other such amounts should be provided for.
  • Stock options: Vesting of stock options or conferring the employees with an equity stock option plan, makes them a shareholder in the company. This is a preferred retention strategy, as the employee gains with the growth of the company and rise in the prices of the stocks.

How to Draft a Retention Agreement?

An effective agreement can be drafted using the following guidelines:

  • Reference to employment agreement: If a separate employment agreement is signed, then a reference to the same should be made. It is preferable though to append both together.
  • Rights and obligations: The rights and obligations of both parties should be outlined.
  • Reference to the event triggering retention: A transfer, a change in ownership, or whatever the event may be, must be sufficiently captured in the agreement.
  • Term: It is always preferable to make the retention agreements for a fixed period of the term.
  • Retention bonus: The amount of the bonus, the currency it will be paid in, the timeline, the model, and the conditionalities should all be included in the contract.
  • If any garden leave was provided to the employee as part of the transition, the same should also be included.
  • A statement to the effect that severance payments have been paid and the retention agreement applies to the new employment period should be mentioned.
  • If an enhanced salary is being paid, the same should be included.

Negotiation Strategies

Typically,  retention agreements do not involve a lot of negotiation. However, if the parties wish to negotiate, the following contentious points may be negotiated upon:

  1. Term of the agreement.
  2. Retention bonus: If you are negotiating from the employer’s side, then you should try to make the retention bonus conditional on certain performance.

Benefits and Drawbacks of Retention Agreement

The benefits of a retention agreement are:

  • It helps in retaining key talent and benefits of the company. During the transfer of business or change in ownership, the new employers or owners lose out on a lot of key personnel. The employee may leave thinking that they will not be given the same level of recognition under the new management. However, a retention offer letter and signing this agreement makes them rethink and helps the employer have the right resources to carry forward their new acquisition.
  • It saves time and costs of hiring new resources.
  • Employees are saved the time /hassle of searching for new employment opportunities. An attractive and higher salary package, a retention bonus, and sometimes a higher designation, is something that benefits them as well as the company.

The drawbacks of a retention agreement are:

  • Prevents the employer from searching for new talent.
  • This leads to expending more costs as an attractive offer needs to be made to retain employees.
  • It provides employees with arm-twisting power.

What Happens in Case of Violation?

In the event an agreement is violated, the parties can approach the courts, or they can sit together and resolve the issue by mediation, arbitration, or other such alternative methods of dispute resolution. Methods of dispute resolution and the choice of law/jurisdiction should be mentioned in the agreement itself.

A retention agreement is an effective way of retaining key talent. However, companies should not overstep in terms of costs in trying to retain key talent. They should always have the termination rights in their hand. Preferably, all disputes should first be resolved through mediation and mutual dialogue.

Sample for Retention Agreement

A sample of the agreement can be downloaded from below.

Download Retention Agreement Template

Retention Agreement

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