Employers’ Use of TRAPs to Avoid Noncompete Scrutiny Prompts Regulatory and Legislative Action
As non-compete agreements limiting workers from joining a competitor have come under heightened scrutiny from civil rights groups and regulators, some employers have begun to use training repayment agreement provisions (TRAPs) as another way to block employees from leaving their jobs.
TRAPs used to be commonly used in certain high-paying positions or specialized industries, as a means to recoup hefty training and hiring costs associated with higher-paying and more specialized positions. However, over the past decade, employers’ use of TRAPs has grown, spreading to other industries and lower-paid positions. The growing use of TRAPs has been further spurred over the past several years by the pandemic and trends associated with the Great Resignation, which has led to a marked increase in employers seeking to enforce such provisions against employees.
TRAPs are included as provisions in employment contracts, and in general they require an employee who leaves a job within a set period of time to pay the employer a specified sum for on-the-job training the employee received while employed. These provisions are generally acceptable where employers are seeking to recoup training costs when they are voluntary and/or when they help employees gain skills that will benefit their career generally, such as obtaining an advanced degree. Such provisions may be impermissible when employers seek to shift to their employees the cost of operational expenses for mandatory trainings required by the employer, including when necessary for the employer to comply with applicable laws. Under these circumstances, where the training is not primarily for the employee’s benefit, critics of TRAPs characterize the agreements as a modern form of indentured servitude and describe the training debt as shadow student debt.
TRAPs recently have been used across a variety of industries, including in health care, fast food, retail, airlines, truck driving, and personal services. A 2020 study by the Cornell Survey Research Institute found that nearly 10% of American workers reported they were covered by a TRAP. A 2022 investigation by the Student Borrower Protection Center estimates that major employers rely upon TRAPs in segments of the U.S. labor market collectively employing more than one in three private-sector workers, with the exclusion of state and federal employers who also heavily rely on the use of TRAPs for civil servants and federal employees. Moreover, these provisions, particularly when used in low-wage industries with high turnover rates, such as nursing and trucking, have a disproportionate impact on women and minority workers.
Often, employers ascribe significant costs for training of dubious value in TRAPs. For example, former employees of PetSmart filed a class action complaint in July 2022 alleging various California labor, consumer, and education law violations arising from PetSmart’s TRAP for employees enrolled in its unaccredited Grooming Academy, which requires groomers to take on $5,000 in debt for grooming training, that is forgiven if the employee works for two years, while most employees barely make over minimum wage while employed at PetSmart.
Employee advocates also have argued that TRAPs violate labor-trafficking laws by forcing or coercing employees into continued work using the threat of serious financial harm in the form of significant debt—an argument that courts have held to have merit. For example, the U.S. District Court for the Southern District of Ohio denied Health Carousel, LLC’s motions to dismiss a putative class complaint and strike class allegations in a case challenging the company’s practice of hiring foreign nurses to work in U.S. healthcare facilities and requiring them to sign employment contracts containing hefty TRAPs, while also refusing to count significant training hours toward the nurse’s commitment period, as violations of federal and state anti-trafficking laws. In doing so, the court noted, “Contracts sometimes contain exit terms that are so one-sided or egregious that a reasonable person may feel compelled to remain in a position out of a fear of the consequences that will follow if the employee leaves.”
Regulatory agencies have taken notice of the detrimental effects of TRAPs, spurring regulatory action to curtail their use.
After launching a public inquiry into employer-driven debt arrangements in June 2022, the Consumer Financial Protection Bureau (CFPB) published a report in July 2023 highlighting the growing prevalence of TRAPs and their effect of impeding worker mobility and suppressing wages. In the report, the CFPB stated its intention to “evaluate the use of training repayment agreement provisions (TRAPs) or other employer-driven debts for potential violations of consumer financial laws” and commitment to “using all its tools to address the risks they may cause for consumers,” though it has yet to take regulatory action.
Moreover, the Federal Trade Commission (FTC) issued a proposed rule in January 2023 which would ban employers from imposing non-competes on their workers. The agency is currently in the process of reviewing substantial public comments, totaling nearly 27,000, and is anticipated to vote on the proposed rule in April 2024. Under the proposed rule, a contractual term that operates as a de facto non-compete clause because it has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer is also banned. The proposed rule defines de facto non-competes to include “[a] contractual term between an employer and a worker 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.” In other words, the FTC views many TRAPs as unlawful under the terms of its non-complete regulation.
In a significant move, the National Labor Relations Board filed a consolidated complaint against Juvly Aesthetics, a chain of medical spas, on September 1, 2023, for labor violations in Ohio and Wisconsin. The complaint includes allegations that the company violated the National Labor Relations Act by demanding that former employees pay $60,000 and $50,000 for the cost of training during their employment under an unlawful non-compete.
On March 20, 2023, the U.S. Department of Labor (DOL) also filed a complaint against Advanced Care Staffing, LLC (ACS) for entering into contracts requiring employees to complete at least three years of full-time work for ACS to retain their wages, while also requiring employees who left before the contracts expired to go into private arbitrations, in which they would be required to pay ACS’s projected future profits resulting from the trainings, plus attorneys’ fees and arbitration costs. The DOL alleged that ACS’s practices violated the Fair Labor Standards Act by leading to employees’ being paid less than the federal minimum wage, requiring employees to pay the company more than they ever earned at ACS to subsidize ACS’ future profits under its arbitration demands, and chilling employees’ ability to exercise their rights.
Several states have banned the use of TRAPs, while others have proposed legislation to do so. Connecticut’s General Statute §31-51r, enacted in 1985, explicitly prohibits employers from requiring employees to sign agreements containing TRAPs. The law was later amended in 1987 to exempt union-negotiated training repayment programs. In California, Cal. Labor Code § 2802, enacted in 1937, requires employers to reimburse employees for business expenses, including “all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer.” In 2020, the legislature added Cal. Labor Code § 2801.1 to clarify that § 2802’s requirement that employers pay for or reimburse employee’s business expenses also applied to training costs related to patient care. With the addition of § 2801.1, the California law explicitly requires that hospitals reimburse employees, as well as applicants, for “any expense or cost of any employer-provided or employer-required educational program or training for an employee [or applicant] providing direct patient care,” while also providing that employers may not retaliate against applicants and employees for refusing to enter into a contract or agreement that would violate that requirement.
State legislatures have also recently introduced new legislation that would ban TRAPs:
- In New York, Senate Bill S6748, introduced on May 8, 2023, would expressly ban TRAPs to the extent they require payment “not reasonably related to the costs the employer incurred for training the worker.”
- In California, Senate Bill 476, introduced on February 14, 2023, would require food service employers to compensate employees for the cost of food safety training mandated by the state’s public health laws.
- In Pennsylvania, House Bill 608, introduced on March 21, 2023, seeks to ban the use of training repayment agreements.
As employers increase attempts to skirt restrictions on the use of non-competes with the use of TRAPs, regulators and legislators should continue to heavily scrutinize the practice, particularly in light of the documented detrimental impacts on workers and the broader economy.
If you are subject to a TRAP, you should consult with an attorney to assess your legal options. Katz Banks Kumin LLP has a team of knowledgeable attorneys who can assist you in determining whether you have a viable claim.