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What is an Employment Bond?

What is an Employment Bond?


Employment Bond

There are several different meanings for the phrase ’employment bond’, so it’s entirely understandable if you’ve read conflicting explanations about just what constitutes an employment bond. This article will attempt to explain the different reasons for purchasing employee bonds, and why each one might be used, so hopefully some of the confusion will be dispelled.

In essence, employment bonds are simply a fidelity bond, which is a bond that provides some degree of insurance for the holder of the policy against the possibility of fraudulent or dishonest acts by specific individuals. However, it’s true that this definition doesn’t quite cover the entire range of possibilities when talking about an employment bond definition. Below, we’ll discuss some of the many variations of employee related bonds.

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Different types: 

Under the general heading of ’employment bonds’, there are a number of different scenarios why this kind of bond would be purchased. First of all, as is the case with all bonds, there are three parties involved in a bond purchase – the principal, the obligee, and the surety. The principal is the individual who purchases the bond, but the party who is actually being protected against damage is the obligee. The surety is the company which issues the bond, and if any kind of validated claim were to be made against the bond, the surety would have to initially pay that claim. However, the surety would then have the option of pursuing the principal to recover that amount, since it would have been the principal who violated the terms of the bond agreement.

One of the most common scenarios where an employment bond would be beneficial is when a company bonds its employees.  (what is a fidelity bond). This type of coverage protects the company against any type of losses it might suffer as a result of employee dishonesty. One example of how this might happen is when an employee has access to valuable company assets or finances, and the job calls for a great deal of responsibility. An accountant for instance, might be given this kind of access to company assets, and so it would be to the advantage of the company to protect itself against any kind of fraudulent activity by bonding the accountant.

In a situation like this, the bonding process can begin right during hiring. A background check would be conducted on the individual to determine if he/she is bondable or not, which means no prior criminal acts or brushes with authorities, and then an application would be submitted to a surety company for bonding. Assuming the employee is approved for bonding, the bond would be issued with a face value commensurate with the degree of risk involved for what the employee has access to. The entire face value amount of the bond would not have to be paid, but usually some small percentage of that amount would be paid instead, for instance 1.5%.

Learn more about what is a performance bond, or how to become bonded in business.  

One employee, many employees, and one position

The coverage parameters of bonds can also be variable. A company can choose to protect itself from the potential acts of a single employee, or it can use a blanket employee bond to be protected against the acts of anyone employed by the company. In other cases, the bond would not cover any specific person, but it would cover the position itself, and thus any employee who happened to hold that position at a given moment in time.

For instance, the accountant bond mentioned above might be issued not for the individual accountant, but for any person who happened to work in that position for a company. Generally speaking, the kinds of bonds which a company chooses to protect itself with, will be whatever best fits the needs of the company, and where it is most vulnerable to any type of damage.

Self-employed bonding

Some situations call for an individual to purchase a bond which protects his company (himself) against any kind of damage which might be caused to a client’s property during work being undertaken. One example of this might be when a plumber who is self-employed purchases a bond which protects his plumbing business in the event that any damage is caused to the house of someone he does work for. If damage is done, then a claim can be filed, and the business will stay protected against having to pay that entire amount.  [How much of a bond do I pay?]

Employee commitment bonding

what is an employment bond

Yet another type of employment bond definition is the one which is agreed to by a company and employee at the time of hiring. The terms of this kind of bond state that, in return for receiving training and financial investment in the newly hired person, the employee will agree to remain with the company for a specified period of time. If the employee chooses to leave prior to the expiration of that time period, the company would be entitled to make a claim against the bond to recover at least part of its investment.

Ultimately, the employee would be responsible for paying at least part of that claim, but such claims are sometimes difficult to enforce, and it’s also possible that the employee will have fled the area. These cases can also degenerate into complex legal battles which hinge on the language used in the terms of the bond itself.

[Let us be CLEAR…This is not a bond type that we recommend.  The employee MUST pay 100% collateral, Plus a premium on top of that! It is not a good deal for anyone involved, especially the employee.  We can’t see a legitimate reason why an employee would agree to this, but it is something we can write.  Its been requested a couple of times, so we can do, but we don’t recommend.]

In summary

The thing to remember about ‘what is an employment bond’ is that there’s really no such thing as an employee bond, per se. It’s a fidelity bond. This particular type of fidelity bond just happens to provide some measure of protection between two basic parties, employee and employer. Even that simple view though, comes with an asterisk, because the employee and employer can be the same person, as we’ve seen above. In some way or another though, you can count on the fact that an employer is being protected against the possibility of damage, either physical or financial, by the acts of an employee, and that a surety company is the guarantor of the  specific bond being issued.  We offer a 401k bond as well.

Surety by NFP is the nation’s leading bonding agency.  Call us to get an employment bond definition today, and let us shop your bond for you!  Or check out our page to read more about how to better define bonding.  We’re always happy to answer any questions you many have.  Learn how to get insurance and bonded for a small business.

employment bond definition

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