Navigating Stay-or-Pay Provisions in Employee Contracts

Understanding Stay-or-Pay Provisions

Many businesses invest in employee professional development through sponsored training and educational courses. However, what happens when an employee takes advantage of this training and then leaves the company shortly after? This scenario often leads to businesses considering whether they can implement 'stay-or-pay' provisions.

The Concept of Stay-or-Pay Provisions

Stay-or-pay provisions require employees to repay their employers if they leave the company within a specified period after receiving company-paid training. These provisions can take various forms, such as training repayment agreement provisions (TRAPs), educational repayment contracts, quit fees, damages clauses, and sign-on bonuses. Essentially, these provisions act similarly to a noncompete agreement by discouraging employees from seeking employment elsewhere through financial penalties.

Legal Considerations and Recent Developments

In 2023, the General Counsel (GC) of the National Labor Relations Board (NLRB) issued a memorandum labeling overly broad noncompete clauses as unlawful, as they deter employees from exercising their rights under the National Labor Relations Act (NLRA). More recently, in October 2024, the GC highlighted that some stay-or-pay provisions might unlawfully infringe upon employee rights. Although the GC's memorandum is not binding, it signals potential areas of focus for future NLRB enforcement efforts.

State Regulations and the Importance of Legal Guidance

Before implementing stay-or-pay provisions or any noncompete agreements, businesses must review their state laws, as the enforceability of such contracts varies significantly across states. Furthermore, given the potential for litigation surrounding noncompete agreements, consulting legal counsel is crucial to ensure the provisions are appropriately drafted and comply with current regulations.