Lump Sum Relocation Package: Everything you need to know
Every year, many companies relocate their offices to save money on operating costs or hire people from other cities. For this, the company must consider moving its current employees to their next location or begin searching for new ones. This is when Lump Sum relocation packages or allowances are a great incentive.
Lump Sum packages are affordable and provide flexibility for employee relocation, adjusting according to the company’s needs, which is why they've become more popular as companies relocate around the world and living as an expat is increasingly attractive.
However, without complete information and clear communication between the employee and the company, they may face unforeseen difficulties and costs. That is why in this article we describe what a Lump Sum relocation package is, what it includes, how it's normally managed, and the types of packages that exist. This is to support before and during the relocation of any expatriate to understand how it works and how to negotiate with whoever works their assignment, whether in another city or country.
What Is A Lump Sum Relocation Package?
Lump Sum Relocation Packages are a single payment in a certain amount intended to cover the cost of relocation for employees, helping them settle in and return to work as quickly as possible. They are usually assigned to those who have more flexibility to quickly move to a new city and job function.
Lump Sum packages include costs related to long-distance corporate moves, both nationally and internationally. This could include temporary housing, the transfer of assets, among other aspects that are detailed below.
¿What should be covered by the relocation allowance?
Lump sum packages should cover a wide range of expenses that can arise during a relocation, mainly helping to pay for the general costs related to the national or international move. Whether managed by the expat or by a relocation partner working on their behalf, these are the factors that relocation packages usually provide:
- Orientation trip: Some expats visit the new country in advance, usually to research accommodation options and familiarize with the area. These costs generally include air flight fees, hotels, meals, etc.
- Travel: Airfare for all family members. This will commonly cover a moderate amount of trips back home, especially during vacations and holidays.
- Moving Costs: Most moving expenses involve the transportation of household goods to the new country, including packing and unpacking, as well as the administration of the shipping process. If it's arranged through an experienced relocation partner, it can be paid with a single fixed fee to cover all services. This should include insurance and consulting services, which in turn can help avoid unexpected costs.
- Storage: It may not be possible to coordinate the arrival of the expat with all their personal items. In such circumstances, temporary storage of his household goods should be covered.
- Housing Costs: While the overall package is calculated to cover the cost of housing, there are unique costs associated with selecting a place to live. Support with other details can also be provided, such as signing a lease and inspecting a home. If accommodation is not settled before departure date, temporary accommodation must also be covered. These costs can cover services such as cleaning, heating, electricity, telephone, internet, among others.
- Current Home lease/sale costs: Relocation allowances can cover the cost of arranging for the rental or sale of the expat's property in the home country, or cover the costs of the lease terms. This may too include the cost of tasks such as cleaning and termination of services and subscriptions (internet, phone, etc.)
- Documentation: Usually, the company will take care of the necessary documents (passport or visa), work permits and other formalities related to the move. If not, the costs derived from this must be covered by the relocation allowance.
- Spousal support: If the expat's partner needs help finding work or setting up their own business, this may require financial support that could be covered by the allowance.
- Pets: If the family pets also move, it may result in additional costs related to the required legal process and paperwork.
- Medical expenses: vaccinations and any other medical requirements must be included in the negotiations.
- Cultural support: The relocation allowance can also include cultural education or training, which may vary from a few classes on what to expect in the new destination to full language programs.
- Repatriation: The return trip should also be covered. It's important to clarify if this is part of a single allowance or if there's a separate agreement to cover the costs of the factors above when repatriating.
How are Lump Sum relocation packages negotiated?
Negotiating a relocation package should be an open dialogue between a company and its employee in order to establish appropriate expectations from both parties.
The employee must present an approximate schedule of when they should move and what they need to achieve it - that is, sell their house, transport their vehicles, childcare, among other key aspects. The company or employer should enter negotiations already knowing what packages they can offer their employees, when they'll need the employee to start their new position, and what corporate relocation services they can suggest.
How are Lump Sum relocation packages used and paid?
Companies offer relocation packages in three different ways of payment, depending on the needs of the employee and the budget of the company. The following are the more commonly used payment methods:
Companies could give the Lump Sum payment in cash directly to the employee, who can manage and spend the money on any relocation costs that arise. With this form of payment, the employer is fully responsible for all corporate moving expenses and the employee must report that amount as income and pay the applicable taxes on the relocation allowance. Later the company will pay the additional amount to cover the taxes accrued.
While this may seem attractive to companies that don't have the time or experience to calculate and manage a relocation package, it has serious disadvantages. Although cash provides flexibility for the expatriate, the responsibility of self-management can create stress and affect the efficiency and productivity of their work.
2. Direct payment to a moving company
Employers can also cover moving expenses by dealing directly with corporate moving companies. The employer is billed for moving expenses, eliminating the need for the employee to get involved and potentially have to pay taxes on their moving costs. This, although it can relieve stress for the employee, also reduces the flexibility of making decisions about their own transfer.
During the process, the employee pays all of their relocation expenses in advance and gets reimbursed by their company once the move is complete. Although the employees must pay for their move, they aren't responsible for the tax burden, and it gives flexibility to both the company and the employee. Employees must keep all receipts of expenses, so their company knows what they spent.
Types of Lump Sum relocation packages
Depending on a company’s needs, expats relocation packages can take different forms, providing more control for the employer, more flexibility for the employee, and even more money saved. Here are the four most used types of lump sum packages.
1. Flat (Fixed) Lump Sum
A flat lump sums for all employees balance the playing field and show that the move costs the same, regardless of the employee's level of experience within the organization. As such, this type of relocation package offers a fixed rate, that is, the same amount of lump Sum for entry-level employees as it is for executive-level employees.
2. Variable Lump Sum
These packages are exclusive for different employees and/or assignees according to the standards established by the company. In other words, with these relocation programs there is no single plan for all employees, but rather the company determines the parameters in question to the specific needs of each expatriate. These standards can involve any of the following.
- Relocation distance
- Rent vs. buy a house
- Family size
- Level of responsibility within the company
- Salary level
- Typical relocation costs
3. Alternative (partial) Lump Sum
With the alternative lump sum, the company pays a specified amount upfront and then refunds the employee based on receipts and supporting documentation. Employers have the final say on what the relocation allowance covers and what they will reimburse their employees. This type of lump sums puts much more responsibility on the employer and generally saves the company more money.
While employees don't have as much control as they would with other Lump Sum packages, they can still have peace of mind knowing that the company will cover most of their relocation costs, such as closing their current home and shipping their household items. This type of payment also releases the employee of the tax burden that the cash would generate.
4. Managed Lump Sum
A Managed Lump Sum is when the company offers a limited lump sum to its employees. With this type of payment, employers have the most control and the company also saves the most money. However, employees need to provide receipts for reimbursements and they don't have the flexibility they get with other relocation packages.
There are cases where the policy that determines what the package covers include the assistance of a specialized relocation management company to advise the expatriate on how to spend their funds efficiently.
Lump Sum relocation packages, which became popular in the 1980s, are now one of the most common methods of providing corporate moving expenses to expats around the world.