Coming or Going? Employer Training Draws Focus of Federal Regulators

The Clash famously asked “Should I stay, or should I go?” on their 1982 album, Combat Rock, and with recent attacks on non-competes at both the state and federal level, some employers are imposing additional costs on employees who take advantage of an employer’s training opportunities only to leave and join a competitor. So-called “stay or pay” clauses, or training-repayment-agreement-provisions (TRAPs), typically require an employee to pay the employer the cost the employer incurred to train the employee if the employee leaves their employment within a certain period of time.

Historically, these clauses were used in employment agreements for high-paying roles or certain specialized industries where there was a dearth of talent at various times, such as airline pilots. With the recent heightened scrutiny on noncompetes and other restrictive covenants, “stay or pay” clauses have become a popular mechanism for employers across all industries to protect their investment in hiring and training employees, as well as to disincentivize attrition.

While there are benefits to including “stay or pay” clauses in employment agreements, employers should also be aware of the potential risks before seeking to enforce such provisions, including potential wage and hour concerns, and heightened scrutiny by federal enforcement agencies.  

Wage Deduction Laws and Minimum Wage Protections

Many states’ wage and hour laws provide for wage deduction provisions, which instruct employers on whether and, if so, when and how deductions from employees’ wages may be made. Notably, wage deduction laws generally prohibit deductions or other repayments from reducing employees’ wage rates below the applicable minimum wage. This is significant in the context of “stay or pay” clauses because if an employer chooses to enforce such a clause, the employer may be subject to wage and hour violations if the repayment for training costs reduces employees’ pay below the minimum wage. While a TRAP agreement may not reflect traditional wage deductions, enforcing a TRAP agreement may implicate wage deduction laws if the repayment reduces employees’ pay below the minimum wage.

Employers who use “stay or pay” clauses for lower-wage workers who are similarly situated may be more susceptible to class and collective actions. For instance, groomer-employees recently filed a class action against its employer, PetSmart, claiming, among other things, that the Company’s use of TRAP agreements violated California wage and hour law.[1] In the complaint, the PetSmart groomers alleged that PetSmart required them to enroll in the Grooming Academy training and that, as part of enrollment, the groomers were required to sign a TRAP agreement which stipulated that the groomers would pay the Company for the cost of training (or $5,000) if they voluntarily quit within two years of commencing the training.[2] While the District Court for the Northern District of California recently granted PetSmart’s Motion to Compel Arbitration, this class action serves as an example of the type of litigation that can result if employers choose to enforce “stay or pay” clauses or TRAP agreements.

Federal Agencies’ Reactions

With an increased use of “stay or pay” clauses and TRAP agreements also comes heightened scrutiny from federal agencies, including both the Federal Trade Commission (FTC) and the National Labor Relations Board (NLRB).

At the beginning of 2023, the FTC proposed a rule banning noncompetes and other restrictive covenants. As we have previously reported, the proposed rule would also apply to what the FTC refers to as “de facto non-compete clauses.” The proposed rule, as currently written, does not explicitly refer to TRAP agreements or “stay or pay” clauses; however, the FTC provided examples of what it might consider to be “de facto non-compete clauses” (an undefined term), including a “contractual term…that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.” While it is unclear to what extent “stay or pay” clauses or TRAP agreements may fall within the proposed rule’s purview, employers may expect that at least some TRAP agreements may be considered unenforceable by the FTC if its rule is implemented (which we highly doubt will occur).

Similarly, NLRB General Counsel Jennifer Abruzzo hinted at TRAP agreements in her memorandum on “Non-Compete Agreements that Violate the National Labor Relations Act.” She explained that “in [her] opinion, business interests in retaining employees or protecting special investments on training employees are unlikely to ever justify an overbroad non-compete provision,” and noted that there are other less restrictive ways that employers may protect training investments. Although not a decision from the Board itself, employers may wish to keep this in mind before deciding to enforce a TRAP agreement especially if the relevant employee(s) are covered under the NLRA.[3]

Takeaways for Employers

While employers may opt to include “stay or pay” clauses or TRAPs within their employment agreements, employers should proceed with caution and consider whether such clauses realistically advance their business needs. Importantly, employers who use the clauses should ensure that the clauses are narrowly tailored to recover the cost actually incurred. The more an employer can connect a repayment to an actual expense incurred, the more likely a court or enforcement agency will abide the agreement. Depending on the industry, this may mean that employers limit the use of TRAP agreements to certain job positions requiring specialized training. On the other hand, with the ever-increasing restrictions on noncompetes and other restrictive covenants, employers may choose to use “stay or pay” clauses or TRAP agreements as many of the aforementioned restrictions have yet to include such clauses. Nevertheless, employers should remain aware of changes in this area.

[1] Scally v. PetSmart, LLC, Case No. 4:22-cv-06210-YGR.

[2] Id.

[3] Also, of note, the Consumer Financial Protection Bureau launched an investigation into “practices that leave workers indebted to employers,” including “employer-driven debt agreements.”