Why ‘Stay-or-Pay’ Agreements Are Currently Under Fire

Stay-or-pay agreements traditionally have been a common talent acquisition and retention tool.

As a refresher, a “stay-or-pay” agreement is an employment contract clause where an employee is required to reimburse their employer for predetermined costs (e.g., training, pursuing a master’s degree, relocation expenses) if they leave their job within a specified time period. Essentially, the employee needs to “stay” with the employer or “pay” back the invested costs if they bolt early. Employers have viewed this practice as a way to protect their investment in hiring, training and developing (primarily new) workers.

These agreements, though, are currently under the microscope, as the American Civil Liberties Union (ACLU) and other legal groups have called for the American Arbitration Association (AAA) to stop enforcing them, stating they amount to “indentured servitude.”

AAA is the world’s largest provider of arbitration, mediation and other alternative dispute resolution services.

Letter and the Law

According to Rachel Dempsey, an attorney for Towards Justice, a nonprofit organization that worked with the ACLU on drafting its Jan. 13 letter, the goal was to bring attention to issues with how such agreements are applied.

“[The AAA has] really prided itself on working to ensure that arbitration as a dispute resolution mechanism is fair and just, [and its activities] address some of the concerns that critics of arbitration have leveled against the practice,” Dempsey said. “We think this is a big blind spot for them — that by administering these arbitrations, they are participating in a scheme to coerce people to continue working in jobs [in which] they can’t support themselves, they can’t support their families and, often, the conditions are not what they thought that they signed up for.”

“Because of the dynamics of arbitration and the way that it is fast moving, it doesn’t require traditional notice requirements,” she explained. “You can’t bring a class case, so you have to pay a lawyer hourly. It just makes it almost impossible for these workers to defend themselves.”

AAA did not respond to a request for comment.

Stay-or-pay agreements also came under recent scrutiny by the National Labor Relations Board (NLRB), with general counsel Jennifer Abruzzo issuing a memorandum arguing certain stay-or-pay provisions are unlawful under the National Labor Relations Act (NLRA). However, since that memorandum was issued, Abruzzo was fired Jan. 27 by the new Presidential administration. As a result, the legal status of these provisions is up in the air.

“It remains to be seen if the new general counsel will continue to take this position,” said Carola Murguia, an associate at the Fisher Phillips law firm.

The Good and the Bad

Several key justifications exist for using stay-or-pay agreements, including employee recruitment, retention and morale.

“The workplace is evolving around the country, and employers are adapting to provide as many employment opportunities as possible — therefore boosting the morale of the workforce,” said Murguia, who added there are few downsides to these agreements when properly enforced.

But certain workplace stay-or-pay agreements can create conditions where inequitable or even illegal behavior can occur, which the ACLU and NLRB are trying to mitigate. The ACLU asserted in its letter “most ‘stay or pay’ contracts are substantively and procedurally unfair and are used to coerce labor.” These contracts also disproportionately impact women and workers of color, said the letter. To address this situation, it called on the AAA to issue a moratorium on arbitrations brought by employers seeking to enforce stay-or-pay provisions against workers.

“In general, anything that ties people to the workplace [may be viewed] with suspicion,” said Tracey Levy, a founding member of Levy Employment Law LLC, who described such provisions as “golden handcuffs.”

An example of “golden handcuffs” is tuition reimbursement. For example, an innocuous provision may state that if an employee earns an A, the employer pays for the cost in total; if they receive a C, the employer would pay 50%; and if the employee did worse, then no reimbursement is possible. But regardless of the grade, if the employee doesn’t stay with the employer for at least a year, they must repay some or all of that reimbursement cost. While the NLRB’s general counsel (GC), Abruzzo “expressed an issue of unfair work conditions. Her assertion was that this employee isn’t going to say something because if they speak up and get fired, then they owe this money back to the employer for their tuition reimbursement,” Levy said.

What Does the Future Hold for Employers?

With Abruzzo out and the direction of the NLRB in flux, what will stay-or-pay agreements look like moving forward?

“This really depends on the risk profile and needs of individual employers,” wrote Kathryn Siegel and Tyler Sims, shareholders at employment law firm Littler Mendelson P.C. “Many employers were taking a closer look at these agreements because of GC Abruzzo’s memo. It is always prudent to evaluate employee/employer agreements and determine the level of risk associated and the potential payoff of maintaining that agreement to the employer.”

What if the NLRB memo is revoked?

“It is very common for new NLRB general counsel appointees to rescind memos from a prior administration,” said Daniel Schudroff, a principal at Jackson Lewis P.C., adding there is a strong likelihood that this memo may go by the wayside. “I don’t envision that stay-or-pay agreements will necessarily change as a result,” Schudroff added.

Siegel and Sims noted it is quite likely that a counsel installed by President Donald Trump will revoke the directive.

The lawyers wrote: “Generally, this means that the new GC will no longer issue complaints alleging that stay-or-pay agreements violate the [National Labor Relations Act] and will make efforts to dismiss current, outstanding complaints alleging the same, as well as finding no merit to pending charges articulating these theories.”

Dempsey agreed, stating it was likely the incoming GC will withdraw the Abruzzo guidance.

“The guidance on stay-or-pay contracts is certainly vulnerable,” she said. “They’re relatively new and unexamined, and so it’s not something that the [NLRB] has focused on like in prior administrations. I think it is a huge blow that when you are compelled into private arbitration, you can’t waive rights to bring claims with government agencies, so these workers still had the option for recourse before the board. I’m worried there is not going to be very much for them moving forward.”

Next Steps

As employers wait for more concrete answers on stay-or-pay provisions, legal experts noted there are contractual considerations organizations may want to address.

“First, it is important to note that the legal attack on these agreements only applies to non-supervisory employees,” Murguia said. “It remains to be seen if the new administration will continue to take the view that such agreements are unlawful.”

If the NLRB continues to take the approach of the previous GC, Murguia said employers should analyze their stay-or-pay agreements in several ways to determine their legal implementation and enforcement:

Ensure the agreement is voluntarily entered in exchange for a benefit.
Ensure the repayment amount must be reasonable (i.e., no more than what the employer spent on providing the benefit).
Ensure the “stay” period must be reasonable in light of the cost of the benefit, the value to the employee, whether the repayment amount decreases over the course of the stay period and the employee’s income.
Ensure the repayment will not be required if the employee is terminated without cause.

“Additionally, certain organizations that have noncompliant agreements should be prepared to pay financial remedies to make any individual employee ‘whole,’” Murguia said. “This could include the difference between what the employee makes and what they could have made absent the provision, plus attorneys’ fees and repairing damages to credit scores.”

In general, employers should continue to regularly consult with their attorneys to review their agreements with their employees, said Siegel and Sims, due to the constantly changing legal landscape at the federal level as well as the state level.

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