“Stay-or-Pay”? A Potential TRAP for Employers!

By Fiona Ong - Shawe Rosenthal LLP

December 15, 2023

A recent New York Times article highlighted the use and, frankly, abuse of Training Repayment Agreement Provisions (TRAP – oooooh, good acronym!), also known as stay-or-pay provisions. Under a TRAP, if an employee leaves their job before a certain specific amount of time has passed, they are required to pay back monies ostensibly tied to the costs of training, or finding a replacement, or even lost profits. The use of TRAPs appears to have significantly increased in recent years, and the Biden Administration is paying attention – and it is not happy.

As originally conceived, TRAPs were intended to protect employers who invested significant time and money in providing specialized training to newly-hired workers. And such provisions were deemed to be legal. The U.S. Court of Appeals for the First Circuit explained in the 1972 case of Wilson v. Clarke that agreements that restrict an employee’s ability to seek new employment after leaving their employer are void as an illegal “restraint of trade” – unless the restriction is reasonable “and not wider than is necessary for the protection to which the employer is entitled. . . .” This concept most often comes up in the context of non-compete agreements, which prohibit the employee from competing with their employer (i.e. performing the same role for another employer or for themselves) for some period after employment ends. But the First Circuit extended it to a TRAP, stating:

"Doubtless an employer who has provided specialized training to an employee – as by a course of studies or the like – might reasonably contract with the employee for reimbursement if the employee should quit before the employer achieves any benefit. However, the employer may not require its ex-employee to make payments to it unrelated to the employer’s damage, simply as a penalty to discourage or punish a job change. At most, the employer, in appropriate circumstances, might require the employee to reimburse it for a sum, or under a formula, reasonably related to what it cost the employer to train him, or to retrain a replacement, or the like. The sum or formula would be enforceable only if “the amount so fixed is a reasonable forecast of just compensation for the harm that is caused” by the loss of the employee."

And over 40 years later, the First Circuit’s words still hold true. According to the Biden Administration and worker advocacy groups, TRAPs impede worker mobility by penalizing workers for trying to seek better employment elsewhere, as well as raising other significant concerns. As David Dayen of prospect.org noted in a recent (and comprehensive!) article, multiple federal agencies are poised to attack such agreements on multiple grounds, including the following:

•    The Federal Trade Commission has issued a proposed rule that would impose a near-total ban on non-competes, as we discussed in our January 6, 2023 E-lert. Significantly, as part of this proposed rule, the FTC specifically noted that liquidated damages provisions (requiring the payment or repayment of sums, such as training costs, if the worker engages in certain conduct) could fall within its definition of a non-compete provision – and would be illegal if the repayment obligation is not “reasonably related” to the employer’s actual costs of training.
•    The Department of Labor argues that such provisions may violate the minimum wage and overtime provisions of the Fair Labor Standards Act. According to the DOL, requiring repayment of recruitment and training expenses violates the mandate that employees receive a wage that is “free and clear” of any obligations. Moreover, such repayment could reduce the employee’s pay below the required minimum wage and overtime premium. And as Mr. Dayen noted, the DOL has already filed suit against a staffing company on these grounds.
•    The National Labor Relations Board’s General Counsel Jennifer Abruzzo has also attacked non-compete agreements, arguing that they violate employees’ rights under the National Labor Relations Act unless they are “narrowly tailored to address special circumstances” that justify the interference with employees’ Section 7 rights, as we discussed in a June 8, 2023 blog post. Given the current Board’s expansive view of the scope of the Act, it is not surprising that the NLRB subsequently issued a complaint against an employer alleging unlawful non-compete and TRAP provisions.

And, as the NYTimes reported, employees are becoming increasingly emboldened to challenge such agreements in court – giving rise to related negative publicity for their employers.

So in light of this heightened attention on TRAPs, employers would be wise to consider whether such provisions are truly necessary and, if so, whether it is reasonable. Such agreements should be used if there is truly specialized and extensive training provided by the employer that has significant value to the employee. On-the-job training of lower wage workers that lasts only a few days or even a couple of weeks may not be appropriate situations for such agreements – both legally and ethically. Moreover, the repayment sum should be tied to concrete costs – not speculative or arbitrary amounts. And use of a sliding scale may be wise – the longer the employee stays, the less they must repay. Most certainly, wise employers should consult with their employment counsel before TRAPping their employees.

Otherwise, TRAPs may pose a trap for employers!

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