Ryan J. Foley/AP Photo
Trucks are seen parked outside the headquarters of CRST Van Expedited, Inc., in Cedar Rapids, Iowa.
Nearly two dozen advocacy groups are urging the Biden administration to ban the spreading practice of “stay-or-pay” contracts, which force workers to compensate employers, sometimes for tens of thousands of dollars, if they leave their job before a set time period.
The New York Times Magazine recently reported on these provisions, an innovation of the private equity industry that can require workers to pay “liquidated damages” for on-the-job training or use of equipment, or unspecified damages resulting from the cost of recruiting a replacement, or even “lost profits” from a worker’s departure.
Seven detailed memos sent to federal agencies and the White House over the past two months and released this week argue that these provisions operate as “de facto non-compete agreements” that lock workers into jobs and prevent them from speaking out about wages or working conditions. The contracts, the memos assert, violate numerous federal statutes that both protect workers from exploitation and more broadly protect health and safety. Therefore, federal agencies can use existing authorities to eliminate them from the workplace.
It should be emphasized that stay-or-pay provisions are enforced by the government; without the power of the courts behind them, any contract would be little more than a scrap of paper. Rules to ban these provisions only change how state power is deployed.
The Federal Trade Commission (FTC) has already proposed a ban on noncompetes, which prevent workers from moving to new jobs within the same field. The FTC’s proposed rule stated that some training repayment agreement provisions (TRAPs), one type of stay-or-pay contract involving reimbursement for worker training costs, are de facto noncompetes, if the payment “is not reasonably related” to actual training costs. But the advocates believe that language can be more expansive, so as to prohibit the vast majority of TRAPs, as well as other forms of stay-or-pay contracts.
Even if the FTC successfully finalizes its rule, that’s not the end of the matter. “With the courts, there’s no guarantee that the FTC rule will be finalized as proposed,” said Reed Shaw, co-author of the memos and policy counsel for Governing for Impact (GFI), a nonprofit that focuses on policy advances through executive action. “A whole-of-government approach in the face of the courts is important for enforcement.”
That’s especially true because the FTC rule wouldn’t reach some exempted workers, including those in the aviation and health care industries.
Other advocates involved in the campaign besides GFI include the Student Borrower Protection Center (SBPC), the American Economic Liberties Project (AELP), and the nonprofit law firm Towards Justice, which has represented workers in stay-or-pay cases. The memos name 16 other supporting groups, many of which sent representatives this week to a conference on stay-or-pay contracts in Irvine, California.
Advocates fear that employers are rapidly shifting strategies by moving away from formal noncompetes, which have drawn too much scrutiny, and instead imposing stay-or-pay contracts, which have been described as “modern-day indentured servitude.” About 10 percent of all workers are subject to TRAPs, according to one survey, and SBPC, which has been highlighting TRAPs and other examples of employer-driven debt as an extension of its student debt work, estimated in a 2022 report that industries that “collectively employ more than one in three private-sector workers” are now using TRAPs in segments of their workforce.
“Employers are leaning on debt to counter the surge in worker power,” said Mike Pierce, SBPC’s executive director. “We need to drive this practice out of the economy before employers can make this the next level of noncompetes.”
ONE OF THE MORE NOVEL CONCEPTS FOR PROHIBITING stay-or-pay contracts, proposed in a memo to the Department of Labor, is on the grounds that they violate minimum-wage and overtime laws under the Fair Labor Standards Act (FLSA).
Workers governed by the FLSA are supposed to receive pay “free and clear” of any other obligations. The threat of debt if a worker is fired or quits can violate that standard, serving as a kickback to the employer for ordinary business expenses like training, retention, and recruitment. In addition, a stay-or-pay contract could reduce weekly salary below the $7.25 federal minimum wage or time-and-a-half overtime requirements. “The theory is that, with every paycheck, employers are giving a conditional wage,” said Shaw, of Governing for Impact.
The Labor Department has actually filed suit against a health care staffing company called Advanced Care Staffing using precisely this argument. ACS requires its employees to commit to three years of service, and if they leave before that, they are charged tens of thousands of dollars in “future profits” along with the cost of arbitration hearings and attorney’s fees. In one instance cited in the complaint, this added up to more than all of the wages paid to one worker, Benzor Vidal, during his three months of employment.
“Under this scheme, the pay that ACS promises its employees may be converted into nothing more than a loan that employees must repay with interest and fees, leaving some employees with no compensation at all, much less the wages required by the FLSA,” the Labor Department wrote in the complaint.
Advocates fear that employers are rapidly shifting strategies by moving away from formal noncompetes, which have drawn too much scrutiny, and instead imposing stay-or-pay contracts.
But the memo notes that courts have ruled inconsistently on these issues, necessitating the department’s Wage and Hour Division to make an interpretation. Wage and Hour could issue “subregulatory guidance” to put employers on notice that stay-or-pay provisions violate the FLSA. This would assist private litigants as well, since the FLSA has a private right of action.
In a statement, Solicitor of Labor Seema Nanda told the Prospect, “We are increasingly concerned about employer provisions and legal actions that chill the rights of workers to effectively exercise their rights … The Department continues to carefully evaluate the use of stay-or-pay agreements, and other contractual provisions that implicate or even subvert the laws we enforce.”
Another agency that has taken action on stay-or-pay is the National Labor Relations Board. In September, I reported on an NLRB complaint out of Cincinnati against an aesthetic services company called Juvly, which sought between $50,000 and $60,000 from two separate employees for training costs after they left the company. The complaint argued that the TRAP violated the National Labor Relations Act’s prohibitions on “interfering with, restraining, and coercing employees in the exercise of their rights.” Juvly filed a motion to dismiss in late October, and the case remains pending.
The advocates’ memo to the NLRB cited the Juvly complaint, and the action that precipitated it: NLRB General Counsel Jennifer Abruzzo’s missive this May instructing regional offices to treat noncompete agreements as an unfair labor practice. But the advocates asked the NLRB to write a new memo, recognizing that stay-or-pay contracts even more directly restrict worker mobility by putting an exorbitant dollar figure on quitting. Such an unfair labor practice makes it harder to improve conditions in the workplace, by rendering threats to resign not credible.
Regional offices, the memo continued, could submit cases that specifically involve stay-or-pay contracts and seek relief for employees. Unlike the FLSA, which exempts certain workers, an NLRB action could cover employees at all income levels.
NLRB spokesperson Kayla Blado said in response to questions from the Prospect, “The General Counsel’s office received the memo and is reviewing it.”
THE FTC’S PROPOSED NONCOMPETE BAN, even if it incorporates stay-or-pay contracts, cannot fully wipe out these abuses from the workforce. That’s because the FTC Act exempts several industries from its rules on unfair methods of competition, including banks and credit unions, partnerships, nonprofits, agricultural corporations subject to the Packers and Stockyards Act, and air carriers.
In fact, aviation companies have been using stay-or-pay contracts routinely, particularly for pilots who work for small regional carriers. Pilots have reported being required to pay up to $100,000 in penalties if they leave prior to their contract period. These penalties are justified as training debts, although the training takes place on flights that make money for the regional carriers. While pilots earn air time toward their 1,500 hours of flying that they must undertake to become a commercial pilot, they’re doing it simply by working for regional carriers with smaller aircraft that are exempt from those restrictions.
Pilots are reportedly treated badly by these carriers, forced to fly substandard planes and work long hours under fatigue. More insidiously, some regional carriers, which are feeders for pilots for larger airlines, have added waivers to the stay-or-pay clauses if the pilots leave for their own partners (regional carriers often operate smaller flights for United, Delta, or American). In this sense, competitors to those partners are blocked from hiring experienced pilots, even if they offer better salaries or bonuses.
Fortunately, the statute setting up the Department of Transportation has language that’s almost identical to the FTC Act, authorizing the agency to investigate and write rules on unfair methods of competition. So DOT could investigate stay-or-pay contracts among air carriers, and then write rules to ban them, a memo to the agency recommended.
Pilots for small regional carriers have reported being required to pay up to $100,000 in penalties if they leave prior to their contract period.
In response, a DOT spokesperson told the Prospect, “We strongly support workers and their ability to move freely to the jobs that will provide them the best pay and benefits. We are looking at these types of arrangements closely.”
Another area where an FTC ban may not do the job involves foreign-educated nurses, who are lured to the U.S. by health systems and staffing agencies from countries like the Philippines with the promise of good jobs and wages. But companies typically require nurses to agree to a time commitment of anywhere from 18 months to three years. If they resign or get fired before then, they incur “breach fees” of up to $100,000. Often, nurses are not told about these provisions until after the company secures them a visa.
The jobs are often underpaid relative to the rest of the industry. Some staffing agencies, the memo states, have been known to not pay nurses in between assignments, creating a literal reserve army of the unemployed. Just this week, five Filipino nurses filed charges against CommuniCare Family of Companies, which are alleged to have employed them under difficult work conditions and forced them to pay $50,000 in breach fees if they resigned early. One of them, Jeddalyn Ramos, said in a statement that she quit and paid the fee, yet CommuniCare sued her anyway for additional compensation.
The nurses with CommuniCare sought an NLRB adjudication. The FTC Act, meanwhile, may not apply to nonprofits, which is the designation for about half of U.S. hospitals. But a memo to the Department of Labor suggested another possible authority: the Immigration and Nationality Act (INA).
Foreign-educated nurses come into the country on EB-3 employment visas, and to get certified for them, employers must attest that there are not sufficient workers in the U.S. to fill the position. The law also requires that adding foreign labor does not “adversely affect” U.S. workers. With this in mind, the Labor Department could issue regulations banning stay-or-pay because of its potential to exploit foreign nurses and thereby adversely affect domestic nurses by depressing wages across the industry.
ONE EXAMPLE IN THE 181 PAGES OF MEMOS stands out. Typically, trucking companies hold multiday onboarding sessions for new drivers, and run training schools to prepare them to obtain a commercial driver’s license. An unnamed trainee at the trucking firm CRST Expedited reported that she was raped by a supervisor at a truck stop in Wyoming in the middle of the night, on her first trip as a student driver. After she reported the rape, CRST told her it couldn’t do anything about the situation without audio, video, or third-party corroboration. Then, the trainee alleged, she was effectively fired by the company, and then charged $9,000 to pay for the training that led to the rape.
The trainee sued CRST and won a $5 million judgment. But private litigation was one of her only recourses, in the absence of regulation regarding TRAPs and other stay-or-pay provisions.
The Federal Motor Carrier Safety Administration, established in 1999, has the authority to issue rules to improve the safety of both drivers and the public roads. A memo to the FMCSA claims that it could ban noncompete and stay-or-pay provisions in trucking contracts, once it conducts a study of the effects of the provisions on safety.
Advocates believe that stay-or-pay provisions increase economic pressure on drivers by locking them into particular employers, thereby suppressing wages. This can lead drivers to not report safety violations or other abuses, because losing their job would trigger debt repayment. It can also lead to unsafe driving, because lower pay could cause drivers to take longer shifts or increase their speed (most are paid by the mile, not the hour).
The DOT spokesperson said that the agency recently launched a task force on truck leasing agreements, another form of predatory debt placed on commercial vehicle divers. “It is critical that workers across the transportation sector are not being set up to fail,” the spokesperson said.
Similarly, the Department of Health and Human Services could use its authority to regulate facilities that receive Medicare or Medicaid funding. Using the Social Security Act, HHS could impose “conditions of participation” on those facilities that would ban noncompetes and stay-or-pay contracts.
Advocates and nursing organizations maintain that, just like with trucking, these provisions can affect health and safety, in this case for patients. They can prevent health care workers under restrictive contracts from speaking up about safety violations or dangerously low staffing levels. They can also increase burnout by locking in workers regardless of the harrowing conditions. Burnout has been known to increase medical error rates, the memo notes.
HHS has yet to comment on the memo.
Finally, advocates delivered a memo arguing that the Biden administration could issue an executive order to ban stay-or-pay agreements for all federal contractors, building on other “high-road” procurement practices like requiring a $15-an-hour minimum wage for contract workers. The administration would only need to connect the new procurement rule to the goals of promoting efficiency or safety.
Another agency, the Consumer Financial Protection Bureau, has undertaken a formal inquiry into employer-driven debt. The agency is reviewing whether TRAPs and other provisions turn employers into financial services providers, thereby making them liable under its “unfair, deceptive, or abusive acts or practices” (UDAAP) authority.
“Stay-or-pay contracts operate to pad profit margins not by developing a new product or improving services, but through deception and raw exercises of market power,” the advocates write in a foreword to the memos. “Agencies across the federal government [should] aggressively regulate and enforce the law.”
