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Navigating “Stay or Pay” Clauses

Navigating "Stay or Pay" ClausesThe use of “stay or pay” clauses in employment agreements is on the rise for many different jobs and industries, but these clauses are now facing heightened scrutiny because of their negative impact and unique harms on employees.

What Are “Stay or Pay” Clauses?

Stay or pay clauses occur when an employment agreement specifies that an employee is required to reimburse their employer for expenses if the employee leaves their job within a specific timeframe. For example, an employer may provide training to an employee, but if the employee quits or is fired before a certain date, the employee is required to pay their employer back for the cost of the training.

Stay or pay clauses have been a longstanding practice for certain specialized jobs, like airline pilots or software engineers, but the use of stay or pay clauses has expanded to common jobs like dog groomers, teachers, nurses, truckers, and firefighters. Employers have argued that stay or pay clauses help protect their investments in hiring and training new employees.  Many courts in California, as well as other states, have found employment agreements with stay or pay clauses to be valid and have allowed employers to be reimbursed by employees who left their jobs before a certain time.[1] Courts have upheld stay or pay clauses on the grounds that employees voluntarily entered into their respective agreements and that the cost of training paid for by employers was an agreed upon loan issued to the employee.

Increased Scrutiny and Criticism for Stay or Pay Clauses

However, stay or pay clauses are now facing heightened scrutiny and criticism as these clauses exploit workers, hinder economic liberty, and are seen as a way to discourage employees from quitting their jobs.

Federal agencies, like the Consumer Financial Protection Bureau (CFPB), are starting to take notice of the frequent use and potential abuse of stay or pay clauses. In June 2023, the CFPB issued a report highlighting employer-driven debt and how stay or pay clauses hurt employees by leaving them indebted to their employers.  The CFPB report referred to stay or pay clauses as “training repayment agreement provisions (TRAPs)” and described how TRAPs impede worker mobility, suppress wages, and force workers to stay in jobs they may no longer want to stay in.[2] The CFPB report discovered that employees face unique harms from employer-driven debt such as 1) being coerced to incur debt as a precondition of employment and subjected to high-pressure tactics during the loan sign up process; 2) an employer’s use of bait-and-switch fine print that allows employers to change the terms of the agreement without the employee’s consent; and 3) barriers in place that prevent career advancement and higher wages.

Other federal agencies, like the Federal Trade Commission (FTC), are taking action to address the problems that come with stay or pay clauses.  In January 2023, the FTC proposed a new rule to restrict the use of non-compete clauses and agreements. The FTC clarified that the term “non-compete clause” includes contractual terms that have the effect of prohibiting a worker from seeking or accepting a job with another employer.  The FTC specifically identified stay or pay clauses as a type of non-compete clause that should be restricted because stay or pay clauses force employees to remain at their jobs or to repay their previous employer for the cost of training if the employee leaves before the end of their contractual commitment period.[3]

Further, California Attorney General, Rob Bonta, voiced concern over the use of stay or pay clauses because these clauses can stifle competition, force workers to remain in jobs they would otherwise leave, and expose workers to significant financial risk or predatory debt collection practices.  In July 2023, the California Attorney General issued a Legal Alert highlighting how stay or pay clauses might violate several provisions of California law. [4] For example, stay or pay clauses may violate Labor Code section 2802, which requires employers to indemnify employees for all necessary expenditures or losses that are incurred by the employee as a direct consequence of the discharge of the employee’s duties.  More specifically, California law prohibits an employer from requiring an employee to repay training costs unless the training is 1) necessary to legally practice the profession or 2) is undertaken by the employee voluntarily and is not a requirement set by the employer.  Additionally, stay or pay clauses may violate California consumer protection statutes, like the Rosenthal Fair Debt Collection Practices Act, which prohibits an employer from engaging in unfair and deceptive acts or practices when attempting to collect an employer-driven debt.  Furthermore, violations of California statutes may also constitute an independent violation of California’s Unfair Competition Law, which prohibits unlawful, unfair, or fraudulent business practices.

What Should Employees Do If They Are Subjected to a Stay Or Pay Clause

Before beginning a new job, employees should carefully read their employment agreements in case there is a stay or pay clause included.  Employees should be aware of any programs where their employer pays for training opportunities and whether the employee is required to pay back their employer for the cost of providing the training.  If a stay or pay clause is present, employees should pay attention to the terms and the time frame specified in the agreement within which an employer can seek reimbursements if the employee leaves the job.

Given the increased scrutiny on stay or pay clauses and the acknowledgement that these clauses hurt employees, the widespread use of stay or pay clauses may begin to decline in the future.  However, if you owe your employer for training expenses, if you are charged for training costs after you quit or were laid off from your job, or if your previous employer is now suing you for the cost of training opportunities, an attorney at Matern Law Group may be able to help!  At Matern Law Group, we are proud to represent employees and can provide assistance in navigating the unique harms associated with unfair stay or pay clauses.  Do not hesitate to contact us for a free consultation.

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