Can an H1b employer include a liquidated damages clause if employee leaves?

Our office frequently receives calls and emails from foreign workers either working on an H1b or contemplating going to work for an H1b employer.  There are lots of rules and regulations regarding the employment of foreign workers and people are often confused about the process.

One of the main questions that people have is whether an employer can require an H1b employee to pay for the fees associated with the visa application.  The general rule is that foreign employees are prohibited from paying any of the fees – filing, legal or otherwise – associated with an H1b application.

I shot a video a few months ago that address this very issue.  You can watch it here.

A remaining question is whether an employer who wants to hire an H1b worker can require the foreign employee to sign a contract which includes a liquidated damages clause or a penalty for leaving the employer before a date certain?

The regulations on H1-B employees specify that employers can charge the worker liquidated damages should they cease their employment before the agreed upon date, but not penalties.  What is the distinction between these two charges?

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The federal regulations specify that the law of whatever state in which the employment took place defines the difference between a penalty and allowable liquidated damages. So it will be a matter of state law.  If the employer is in one state and the employee another, a question may arise regarding which state’s law on liquidated damages applies.  The contract itself might set forth which law applies in what’s called a “choice of law” provision.  In any event, you will need to consult with a lawyer to see what your state’s law allows.

While the details of state laws differ, in general, the distinction is that liquidated damages are specific amounts of money agreed to by both parties when the contract is signed, and they must be “reasonable approximations or estimates” of the damaged caused to the employer by the employee breaching the contract.  Penalties are also agreed to in the contract, but are not “reasonable approximations.”

Put simply, the purpose of a permissible liquidated damages clause is to put the employer in the financial position they would be in without the breach, while the purpose of a penalty clause is to go beyond this and punish the employee for breaching.  Additionally, it is generally required by states that the relationship between the parties is taken into account (i.e., if the employer used fraud or coercion in inserting the damages clause into the contract, their position will be looked on less favorably).

Finally, the federal regulations do not allow the employer to include the certain parts of the H1-B application fee as part of any liquidated damages clause.

For the exact language of the regulations, see 20 CFR 655.731(c)(10)(i)-(ii).  This is a very technical area of the law.  If you have concerns about a contract that your employer wants you to sign, or that you already signed, you should consult with an experienced immigration employment attorney.  Feel free to give us a call at (314) 961-8200.