NLRB GC to Seek Broad Remedies for Non-Compete and Stay-or-Pay Provisions – Part II

By Chad M. Horton - Shawe Rosenthal LLP

November 15, 2024

As we noted in Part I of this special two-part blog, National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo issued an important policy memorandum last month. In GC Memorandum 25-01, Abruzzo attacked as unlawful both “stay-or-pay” provisions (where workers agree to repay their employer for certain benefits if the employee prematurely leaves employment) and non-compete agreements. Part I covered the remedies proposed by the GC for employees subject to non-compete provisions found unlawful by the Board. Here, Part II addresses stay-or-pay provisions, the GC’s legal position that such provisions are presumptively unlawful, and the remedies she will seek for employees subject to stay-or-pay provisions.

Before we proceed, employers should keep in mind the following caveats. This memorandum does not carry with it the force of law or otherwise change Board law. Rather, it merely sets forth the GC’s legal position. But, employers can expect the GC to advance her legal position against employers who proffer and maintain non-compete and stay-or-pay provisions that the Board may ultimately find unlawful. Additionally, with Donald Trump’s victory in the presidential election, GC Abruzzo very likely will not be retained beyond Inauguration Day. Thus, there is a low likelihood that a case addressing stay-or-provisions will arise prior to her exit from the agency – or, if one did arise, a Trump-appointed GC may elect to abandon the case. Nevertheless, we cover her policy position on stay-or-pay provisions in this blog.

Stay-or-Pay Provisions To Be Scrutinized During Remainer of GC’s Term

GC Abruzzo contends that most “stay-or-pay” provisions are unlawful unless narrowly tailored. Noting that such provisions are “increasingly common,” GC Abruzzo advances two arguments in support of her position. First, GC Abruzzo argues that stay-or-pay provisions restrict employee mobility by making resignation “financially difficult or untenable.” Second, GC Abruzzo believes that stay-or-pay provisions increase employee fear of termination if they were to engage in conduct protected by the National Labor Relations Act (NLRA), thereby interfering with employees’ right to engage in such conduct.

Accordingly, GC Abruzzo will consider all stay-or-pay provisions to be presumptively unlawful. To rebut that presumption, an employer must demonstrate both (1) a legitimate business interest advanced by the provision, and (2) that the provision is narrowly tailored to meet that interest. According to GC Abruzzo, stay-or-pay provisions such as quit fees, damages clauses, and other provisions forcing employees to remain employed by imposing fees solely to retain employees will never be supported by a legitimate business interest.

But where, for example a stay-or-pay provision is designed to recoup an employer’s payment towards an employee benefit if the employee does not remain employed long enough for the employer to reap the return on that benefit, the provision may have a legitimate business interest but must be narrowly tailored. To be considered “narrowly tailored,” the employer must establish all of the following elements:

1. The Provision was Voluntarily Entered Into in Exchange for a Benefit

To pass muster, the stay-or-pay provision must be “fully voluntary.” Put simply, the employee should choose whether to accept the benefit subject to the stay-or-pay provision, and there should be no financial loss or adverse employment action if the employee declines to agree to the provision. GC Abruzzo considers it “advisable” to make the voluntary nature of the benefit explicit in any stay-or pay provision.

GC Abruzzo provided examples of when she would and would not find a provision to be “fully voluntary.” For instance, an employer could make the cost of a training necessary to obtain a promotion subject to a stay-or-pay provision. Additionally, an employer may subject an employee to a stay-or-pay provision for a necessary training credential if the employee had options to obtain the training or credential from a third party. In contrast, mandatory training provided by or arranged by the employer cannot be fully voluntary – and telling an employee that they can pay out-of-pocket in lieu of a stay-or-pay provision will not suffice, according to the GC.

GC Abruzzo also addressed when more common forms of stay-or-pay provisions, such as sign-on bonuses and relocation stipends, would be considered fully voluntary. In such cases, the employer must give the employee the option of (1) taking the benefit upfront subject to a stay-or-pay provision, or (2) deferring receipt of the benefit until the end of the “stay period.”

2. Reasonable and Specific Payment Amount

Next, the stay-or-provision must provide a reasonable repayment amount. The amount must be specifically stated. To be “reasonable,” the repayment amount may not exceed the cost to the employer of the benefit provided to the employee. To meet the “specific” prong, the employee must be informed of the repayment amount at the time they agree to the stay-or-pay provision.

3. The Stay Period Must Be Reasonable

GC Abruzzo asserted that this inquiry will be performed on a case-by-case basis. The cost of the benefit will be considered, with longer stay periods being permissible for costlier benefits. The GC will also consider whether the provision provides for a decreasing repayment amount as the stay period progresses, the employee’s income, and the value of the benefit to the employee.

4. No Repayment Requirement if Employee is Terminated Without Cause

The stay-or-pay provision must not require repayment if an employee is not terminated for cause, including if they are terminated unlawfully. GC Abruzzo was clear that stay-or-pay provisions “must effectively state that the debt will not come due if the employee is terminated without cause.” Thus, the GC will not find that the provision is narrowly tailored absent such language.

As she did with non-compete provisions, GC Abruzzo laid out the remedies she intends to seek where the Board finds a stay-or-pay provision to be unlawful. If the provision was entered into voluntarily, GC Abruzzo will require an employer to rescind the provision and replace the unlawful elements with appropriate language.

Where, however, the provision was not entered into voluntarily, GC Abruzzo will seek rescission of the provision and notification to the employee that (1) the stay period obligation is terminated, and (2) any debt that would be incurred pursuant to the provision is nullified and will not be enforced. For example, an employee subject to a stay-or-pay provision for mandatory training will be notified that the provision is nullified and any debt that may be incurred is erased. Moreover, a sign-on bonus that did not include an option of deferring payout until the end of the stay period must eliminate the repayment requirement without unwinding the previous payment.

In addition, an employer must retract any enforcement action taken to collect payment from the employee and make the employee whole for any financial losses as a result of the enforcement action. The GC will pursue repayment to the employee any amount paid to an employer in response to an employer demand pursuant to an unlawful stay-or-pay. If the employer initiates a collection or other legal action, GC Abruzzo will pursue compensation for legal and associated fees incurred by the employee. The GC will also require that an employer take steps to correct the negative impact a collection may have on the employee’s credit rating.

Last, the GC will ask the Board for compensation where employees were (allegedly) deprived of better employment opportunities because they remained in their jobs for fear of violating the stay-or-pay provision. The employee must establish that they were qualified for a vacant position with another employer, and that they were discouraged from applying or did not accept the position.

While there are few silver linings from this memo for employers, GC Abruzzo assured employers she would exercise “prosecutorial discretion” and not initiate legal action against employees for certain pre-existing stay-or-pay provisions in certain circumstances. Specifically, employers will have 60 days from the date of the memo to cure elements in stay-or-pay provisions that GC Abruzzo has advised she considers unlawful. Among other examples, if a repayment amount exceeded the cost of the benefit, an employer could cure that element by reducing the amount to no more than the cost of the benefit to the employer and amend the agreement accordingly.

Conclusion

Employers should expect GC Abruzzo to target stay-or-pay provisions for the remainder of her term as GC. But due to the presidential election results, it remains unclear whether she will have sufficient time on the job to see this policy through. Given the cyclical nature of the country’s politics, however, there will likely again come a day where stay-or-pay provisions are targeted by a NLRB GC, even if it such targeting is highly unlikely under the Trump administration.

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