Liquidated Damages Provisions in H-1B Context

By Ekaterina Powell, Esq.

As H-1B season is about to begin and companies across the U.S. are preparing for the H-1B recruitment period, we would like to remind our readers about the employment terms specific to H-1B candidates.

H-1B nonimmigrants are a great way for many employers to supplement their workforce when there is a shortage of qualified American workers. H-1B program can be an alternative to outsourcing when the shortage of labor exists. The H-1B visa allows foreign nationals to enter the U.S. temporarily for an initial term of three years to engage in professional occupations. Hiring an H-1B nonimmigrant is not an easy task. Apart from the tedious visa process, employers spend considerable time and resources in screening candidates, lengthy international telephone interviews, arranging for relocation of the candidates, training, etc. Sometimes however, after all these efforts in trying to bring the workforce into the U.S., today’s competitive marketplace serves as a tough reality for these employers as some of the H-1B nonimmigrants choose to leave the employers shortly after entering the U.S. in search for better opportunities.

So, when it comes to the Employment Agreements with the H-1B nonimmigrants, it is quite understandable that employers want to recoup some of the damages caused by termination of employment by the H-1B nonimmigrant prior to the end of the validity period of the approved H-1B petition.

To protect the companies’ interests, employment contracts often stipulate for liquidated damages in case of early termination of employment by the H-1B nonimmigrants. It is important to keep in mind however that an impermissible penalty clause for early cessation of employment can not only be subject to litigation in state court but can also lead to investigation of the employer’s entire H-1B practices by the DOL’s Wage and Hour Division.

Often times, companies choose to use only employment law attorneys to prepare the Employment Agreements with the H-1B nonimmigrants. However, employment attorneys may not be well-versed in the immigration context and may not be aware of the specific immigration restrictions concerning H-1B workers. That’s when an immigration attorney comes in. When there is a conflict between the company and the employee and a question arises as to whether the employer can recoup any of the damages caused by the employee’s early termination, an immigration attorney can be of great help to the employer or the employee assisting in the analysis of the agreement and advising as to what can and cannot be included as part of the employment terms for H-1B workers.

Liquidated Damages vs Penalty

Liquidated damages provisions for the breach of the employment contract can be valid, but there are a number of specific provisions covering the use of these clauses in H-1B context.

An H-1B worker, whether through payroll deduction or otherwise, can never be required to pay a penalty for failure to complete the full employment period. An employer, however, is permitted to recover bona fide liquidated damages from the H-1B employee who ceases employment with the employer prior to an agreed dated. See INA 212(n)(2)(C)(vi)(I), 20 CFR 655.731(c)(10)(i).

The distinction between the permissible liquidated damages and the impermissible penalty is to be made on a case-by-case basis in accordance with the applicable state law.

Generally under state laws, a bona fide liquidated damages provision has the following characteristics:
• liquidated damages are fixed amounts agreed upon by the parties at the inception of the contract
• liquidated damages are reasonable approximations or estimates of the anticipated or actual damage caused to one party by the other party’s breach of the contract
• the sum stipulated must take into account whether the contract breach is total or partial (which in terms of early termination means the length of time the H-1B worker has remained with the employer before terminating employment relationship). See 20 CFR 655.731(c)(10)(i)(C), Vanderbilt University v. DiNardo, 174 F.3d 751 (6th Cir. 1999) (applying Tennessee law); Overholt Crop Insurance Service Co. v. Travis, 941 F.2d 1361 (8th Cir. 1991) (applying Minnesota and South Dakota law); BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999); Guiliano v. Cleo, Inc., 995 S.W.2d 88 (Tenn. 1999); Wojtowicz v. Greeley Anesthesia Services, P.C., 961 P.2d 520 (Colo.Ct.App. 1998); see generally, Restatement (Second) Contracts §356 (comment b); 22 Am.Jur.2d Damages Secs. 683, 686, 690, 693, 703).

• the objective of the damages should be compensatory in nature and not punitive
• the greater is the difficulty to prove loss or to establish the amount of loss with certainty, the higher is the likelihood that the amount of damages can be considered reasonable.

Regardless of the treatment of liquidated damages under state laws, repayment of any part of the ACWIA H-1B filing fee, which is currently $750/$1500 depending on the size of the employer, can never be included in the liquidated damages provision (NOTE: ACWIA fee used to be $500/$1000 and this is how it is referred to in 20 CFR 655.731(c)(10)(ii)).

On the other hand, under the laws of the various States, if the liquidated damages clause is unconscionable or, although fixed or stipulated in the contract by the parties, bears no reasonable relationship to the anticipated or actual damages caused by early cessation of employment, it will generally be considered an unenforceable penalty.

The DOL’s Wage and Hour Division lists the following characteristics of an unenforceable penalty:
• A fixed termination payment regardless of the term of the contract and the length of time during which the contract was in effect before termination;
• An unexplained or unjustified amount of money which is not attributed to any particular cost or loss;
• An amount of money which appears unreasonable in comparison to the worker’s earnings; or
• An agreement that is the result of fraud or where it cloaks oppression.

Deduction of Liquidated Damages from H-1B Nonimmigrant’s Wages

The DOL further clarifies that even if an H-1B worker is subject to or owes liquidated damages, the employer cannot make a deduction from the worker’s paycheck if doing so will reduce the worker’s wages below the required wage rate. 20 CFR 655.731(c)(10)(i)(B).

If the employer wishes to make a deduction in wage or reduce the amount of the last paycheck of the H-1B worker, the employer has to comply with 20 CFR 655.731(c)(9)(iii), which specifies the requirements of an authorized deduction in wage. What constitutes an authorized deduction from wage paid to H-1B worker is by itself a separate topic for discussion. For the purposes of liquidated damages deductions, employers should keep in mind the following points:
• The deduction needs to be agreed upon by the employee (e.g. clearly provided for in the employment agreement)
• The wage garnishment may not exceed 25 percent of an employee’s disposable earnings for a workweek
• The deduction cannot be a recoupment of the employer’s business expenses (which includes attorney’s fees and filing costs related to preparation and filing of LCA and H-1B petition if the employee’s wages fall below the required wage rate).

If the language of the agreement stipulates for repayment of ACWIA filing fee in any way or other employer’s business expenses associated with H-1B processing through the deduction in the H-1B nonimmigrant’s wage, then the provision may be considered a penalty and may be in violation of the DOL’s regulations.

In DOL enforcement proceedings, the Wage and Hour Administrator is granted authority to determine, applying relevant State law (including consideration to actions by the employer contributing to the early cessation, such as the employer’s constructive discharge of the nonimmigrant or non-compliance with its obligations under the INA and its regulations), whether the payment in question constitutes liquidated damages or a penalty.

If the employer is found to have imposed an early termination penalty in violation of the Act and regulations, the Administrator may impose a civil monetary penalty of $1000 for each such violation and issue an administrative order requiring repayment of the money the H-1B employee paid in violation. In addition, the if the Administrator sees a pattern of violations or uncovers other abuses of the H-1B program, additional sanctions including debarment from the H-1B program may be imposed on the employer.

ALJ Upholding Liquidated Damages Clause in DOL Enforcement Proceedings

Below is an example of a liquidated damages clause that was found to be valid in the proceedings before the DOL.

A U.S. Department of Labor Administrative Law Judge (“ALJ”) has held that the employer could recoup liquidated damages from the H-1B worker who left employment early, in accordance with the employment agreement entered into at the beginning of the employment relationship. See In The Matter of Administrator, Wage and Hour Division v. Greater Missouri Med. Pro-Care Providers Inc., No. 2008-LCA-26 (Oct. 18, 2011).

In that case, the employment agreement contained a provision requiring H-1B employee to pay specified damages to the employer in the event of early termination of the agreement by the employee. The amount of damages varied depending on the timing of the termination, requiring the employee to pay lesser amounts following longer periods of employment relationship.

At the time of the investigation, the president of the company explained its liquidated damages provision as follows:
The set amounts of damages were based on three considerations: 1) damages to the employer and its need to protect its overall investment and interest as a going concern, and investment of the company in securing the services of the employee; 2) direct and indirect costs incurred in bringing the H-1B employees to the U.S. and the amount of profits expected to be derived from each worker ($1,000 per worker per month); and 3) the market perspective value of such employees to other employers who may seek to hire such workers away from the employer.

In that case, the ALJ concluded that the damages provision was not a penalty for early termination but rather a bona fide liquidated damages provision. As such, the ALJ ordered the worker to pay the employer damages as provided for in the agreement.

As you can see, navigating the intricacies of immigration law without competent help can be a tedious task. If you require help in the H-1B processing, H-1B compliance or in the DOL enforcement action, contact our office for a consultation.