Training repayment agreements (TRAs), also known as training repayment agreement provisions (TRAPs) or "stay or pay" provisions, have made headlines recently, thanks to lawsuits from Colorado's attorney general (AG) and at least one large multistate settlement.
What Are TRAPs?
TRAPs are provisions included in employment agreements that require employees to repay a specified amount of money for employer-provided training if the employee leaves his or her employment before a specified time.
Historically, TRAs were commonly used for high-paying positions (e.g., securities brokers, engineers, airline pilots, etc.) and specialized industries. They were seen as a generally accepted way for an employer to recover a portion of the cost of providing specialized training to a new employee.
TRAs are now increasingly used in different industries for broader groups of employees, in part to protect the loss of investment in employee training during the "Great Resignation" and legislative and regulatory efforts to limit the use of non-competes. For example, in some instances, TRAs have been used to compel employees to repay the cost of training that employers are legally required to provide or compel the repayment of an amount that is significantly higher than the actual value of the provided training. Critics of these provisions argue that they suppress wages and restrict worker mobility – especially for women and minorities – by "trapping" them in low-paying jobs due to the threat of a large debt.
Federal Regulations on TRAPs
Federal agencies under the previous administration took several steps to restrict the use of TRAPs. For example:
- The Consumer Financial Protection Bureau (CFPB) launched a formal inquiry into employer-driven debt and published a formal report in July 2023 highlighting the prevalence of TRAPs and risks for workers associated with them.
- The Federal Trade Commission (FTC) proposed a final rule in 2023 that would have banned de facto non-competition clauses (contractual terms between an employer and worker that require the worker to pay the employer or third-party entity for training costs if the worker's employment terminates within a specified time period and the required payment is not reasonably related to the costs actually incurred to train the worker). However, this rule is not currently in effect.
- The FTC and U.S. Department of Justice (DOJ) adopted the Antitrust Guidelines for Business Activities Affecting Workers, which indicated that TRAPs may violate federal antitrust law.
- The U.S. Department of Labor (DOL) filed a lawsuit against a Virginia-based information technology (IT) staffing agency alleging that the agency's practice of requiring its employees to sign an agreement to repay up to $30,000 if they left before completing 4,000 hours (about two years) of billable work caused the employees to earn less than the federal minimum wage in violation of the Fair Labor Standards Act (FLSA). The DOL resolved this case following the transition to the new administration.
- The former general counsel of the National Labor Relations Board (NLRB) issued two memoranda indicating her intent that the NLRB seek remedies for employees required to sign TRAs because they limit employee mobility and chill Section 7 rights under the National Labor Relations Act (NLRA). However, these memoranda were subsequently rescinded by the current general counsel.
- The NLRB brought charges against a medical spa that required its lower-level employees to repay training costs if they left within two years of hire. The NLRB announced a settlement in February 2024.
Though the prior administration explored several options for the federal regulation of TRAPs, the current administration has not taken similar action, which could indicate more leniency with TRAPs at the federal level.
Colorado Regulations on TRAPs
Because of the lack of clear federal regulation, some states have started governing TRAPs. Colorado has emerged as a trailblazer in this area by taking the following actions:
- Passing Laws to Restrict TRAPs. Under Section 8-2-113, C.R.S., governing restrictive covenants, Colorado law permits employers to use TRAPs in employment agreements when the employer-provided training is distinct from normal, on-the-job training (and satisfies other requirements). But, it limits the employer's recovery of training expenses to the reasonable cost of actually training the employee, which decreases proportionally over two years. An employer who violates this law is liable for actual damages and a penalty of $5,000 per worker harmed by the conduct. A 2024 amendment to this law, HB24-1324, considered TRAPs to be "consumer credit sales" under the Colorado Consumer Code in a similar fashion to student loans, which trigger specific requirements and enforcement mechanisms. The amendment permits the AG to recover three times the amount of the employer's actual or attempted recovery of training costs, which the Colorado AG has recently invoked.
- Investigating Violations. The Colorado AG, in conjunction with the AGs of California and Nevada and Biden Administration CFPB, conducted an investigation into the TRAP practices of a large healthcare company, alleging that it violated consumer protection and labor laws by withholding information about TRAPs from prospective nurses. This investigation resulted in a settlement.
- Bringing Enforcement Actions. The Colorado AG also filed a lawsuit against PetSmart LLC due to its alleged deceptive use of TRAPs. The lawsuit alleges that once the potential employees signed up for a "free" training program, they were required to sign a TRAP that required them to repay 100 percent of the approximately $5,500 training costs if they left employment before a full year and 50 percent if they left between one year and two years. The lawsuit further alleges that the training program was unsatisfactory and that PetSmart sent nearly two dozen groomers to collections. The AG is asking the court to declare that PetSmart violated the Colorado Consumer Protection Act (CPA), enjoin the company from illegal practicesand forbid PetSmart from collecting any money under the TRAs, as well as award civil penalties, actual damages and attorneys' fees.
Colorado is not the only state taking actions to regulate TRAs. For example:
- Connecticut prohibits the execution of promissory notes as a condition of employment.
- California requires employers to reimburse employees for business expenses and explicitly requires that hospitals reimburse employees for any expense or cost for any employer-provided or required educational program or training for direct patient care employees.
- New York and Pennsylvania have introduced legislation to prohibit TRAs altogether.
Practical Implications
TRAPs remain legal under certain circumstances. However, the fate of federal regulation under the current administration is uncertain. Should the current administration decide to regulate them, the previous administration provided plenty of examples of how to do so, such as through the FTC's regulation of restrictive covenants and antitrust law, DOL's enforcement of the FLSA and NLRB's enforcement of the NLRA.
Employers who wish to utilize TRAPs should carefully review their policies and practices in light of recent enforcement activity and consider proactive adjustments to reduce risk. Employers should also stay vigilant for federal regulations and state consumer protection laws in the states where they have employees.
