Today’s New York Times contains an excellent article on the increasing use of so-called “stay or pay” clauses in employment agreements. Once an employee signs a contract with a “stay or pay” clause, if that employee quits before X months/years (each contract is different), the employee will have to repay the employer for the costs incurred to recruit and train the employee. Sometimes also called “training repayment agreement provisions,” or “TARPs,” these agreements have historically been popular in high-earning, specialized industries — like airplane pilots, healthcare workers, and police officers — that required substantial up-front training.
But now TARPs have found their way into more common jobs like bank workers, dog groomers, paramedics, truckers, and social workers. That’s because employers are looking for ways to save (or recoup) money, of course. But it’s also for another reason: it discourages turnover. Employers have figured out that, if they can saddle employees with a large debt in the event that they quit — or at least scare them into thinking that — many employees will stay. It’s a strategic solution to today’s historically tight labor market.
According to today’s New York Times article, employees are increasingly fighting back. They’re arguing that employers have inflated the damage amounts in their TARPs or have inserted damages that aren’t caused by the employee’s departure. In this way, TARPs operate as a “penalty” imposed for breaching a contract, which are illegal when the penalty imposed is inflated or bears little relationship to the damages suffered by the non-breaching party. Other employees are arguing that TARPs function as a de facto covenant not to compete because they discourage employees from quitting. In California and a handful of other states, a pure covenant not to compete is illegal — as is anything that functions as a de factor non-compete, like a client/customer non-solicitation clause.
With experts estimating that 33% of U.S. employees currently work in industries where TARPs are prevalent, regulators and politicians are starting to take notice. The Federal Trade Commission recently proposed a new rule that would ban contractual clauses like TARPs that function as de facto covenants not to compete. Similarly, the Consumer Financial Protection Bureau recently announced an investigation into employer practices that leave employees “indebted to their employers.” The California Attorney General, Rob Bonta, is similarly concerned with the increasing use of “stay or pay” clauses because they deter employees from leaving abusive workplaces, thereby also deterring employees from bringing valid claims for unpaid wages or workplace discrimination.
Here at Workplace Legal, we’ve handled numerous cases with “stay or pay” clauses. If you are an employer who is considering the use of a TARP in your employment agreements, contact us. We know how to draft these agreements without running afoul of California’s laws against employer clawbacks and covenants not to compete.
You can read today’s New York Times article here.