April 23, 2024 | WASHINGTON, D.C. — The Federal Trade Commission (FTC) released a final rule today that would restrict companies that it regulates from requiring workers to enter non-compete agreements and functionally similar contracts. This ban includes Training Repayment Agreement Provisions (TRAPs) and other stay-or-pay contracts, where these contracts “function to prevent a worker from seeking or accepting other work or starting a business after the employment.”
Stay-or-pay contracts take many forms. Use of these functional non-competes has increased rapidly, serving as substitutes for traditional non-competes, which have come under growing scrutiny from federal government agencies and state lawmakers. One of the most common types of stay-or-pay contracts is Training Repayment Agreement Provisions (or TRAPs). TRAPs are often presented as a condition of employment and require workers who receive on-the-job training—regardless of quality or necessity—to pay back the supposed “cost” of this training to their employer when they leave their job. In other types of stay-or-pay contracts, employers have demanded departing employees pay them for not providing a 4-month notice of resignation, the salary of their replacement, liquidated damages, or even “lost profits.”
Legal scholars have expressed concern that TRAPs may be even more effective at limiting or blocking workers from leaving their jobs than traditional non-competes, particularly for low-wage workers who can’t afford to pay their employer a substantial sum to quit. While traditional non-competes aim to limit workers from departing for a competitor, TRAPs and stay-or-pay contracts may be enforced against a departing worker for any reason, including to navigate personal hardship such as a family health crisis or a childcare shortage.
In response, advocates released the following statements:
“The new FTC rule will limit the ability of employers to use debt to lock nurses into unsafe jobs and will protect their role as patient advocates. We commend the FTC for standing up for workers,” said Jean Ross, RN, President of National Nurses United.
“Too many working people get trapped in jobs by employers over inflated debt for ‘required’ on-the-job training. Thankfully, the FTC has recognized this lopsided power dynamic and taken action to protect the nurses and other healthcare professionals stuck in such aptly named contracts: TRAPs,” said Randi Weingarten, President of the AFT. “This non-compete rule ensures workers can get the job education and training they need without hijacking their right to leave bad jobs or bargain with employers.”
“Today’s rule will free millions of workers who are currently trapped at work under the looming threat of debt,” said Chris Hicks, Senior Policy Advisor at the Student Borrower Protection Center (SBPC). “Employers nationwide have increasingly relied on stay-or-pay contracts like TRAPs to try and prevent workers from having the freedom to leave their jobs. This rule re-establishes that core economic liberty, and once again reaffirms that indentured servitude is illegal.”
“Employers have increasingly moved to stay-or-pay contracts, like TRAPs, to avoid non-compete bans and keep workers from exercising their right to leave bad jobs,” said Rachel Dempsey, Attorney at Towards Justice. “We commend the FTC for recognizing that empowering workers to advocate for themselves, negotiate for better wages and working conditions, and leave bad jobs requires banning not only non-competes but also the de facto non-competes that leverage debt to keep workers trapped.”
“What’s old is new again. Like indentured servitude contracts of centuries past, contemporary TRAPs deny American workers the ability to seek better pay and working conditions across industries,” said Lee Hepner, Sr. Counsel at the American Economic Liberties Project. “Forced indebtedness for basic on-the-job training is another form of non-compete clause, and it’s both coercive and exploitative. The FTC is comfortably within its authority to address non-competes and TRAPs in the same breath.”
“In its final rule, the FTC plugged a significant gap in its proposed non-compete ban, which Open Markets, SBPC, and others had identified in our comments last April,” said Sandeep Vaheesan, Legal Director at Open Markets Institute. “The final rule prohibits both conventional non-compete clauses and newfangled versions like TRAPs. By banning all forms of non-compete contracts for workers, the FTC will prevent employers from evading this important pro-worker rule.”
“This rule means that employers will need to find better ways to make workers want to stay in their jobs, rather than forcing them through contract,” said Jonathan Harris, a law professor at LMU Loyola Law School Los Angeles and Senior Fellow at SBPC. “By also banning functional non-competes, the rule stays one step ahead of employers who use ‘stay-or-pay’ contracts as workarounds to existing restrictions on traditional non-competes. The FTC has decided to try to avoid a game of whack-a-mole with employers and their creative attorneys, which worker advocates will applaud.”
The FTC’s decision to ban functional non-competes, like stay-or-pay contracts and TRAPs, will empower millions of workers to bargain for better wages and working conditions, or freely leave for a better opportunity elsewhere. This is a critical step that will protect millions of workers, most notably those who are just starting their careers. In March 2024, academics uncovered new findings about the prevalence of TRAPs, uncovering a rise in survey respondents indicating they have worked under a TRAP, from 4.1 percent in 2014 to 8.7 percent in 2020. This means that with today’s rule in effect, millions of workers who were previously unable to leave their jobs without triggering tens of thousands of dollars of contingent loan obligations under stay-or-pay contract schemes now have the ability to.
Further Reading
Read our fact sheet on TRAPs: FACT SHEET: Training Repayment Agreement Provision (TRAPs), Stay-or-Pay Contracts and the Economy
Additional background on TRAPs: Background on Training Repayment Agreement Provisions
###
About Student Borrower Protection Center
Student Borrower Protection Center (SBPC) is a nonprofit organization focused on eliminating the burden of student debt for millions of Americans. We engage in advocacy, policymaking, and litigation strategy to rein in industry abuses, protect borrowers’ rights, and advance racial and economic justice.
Learn more at protectborrowers.org or follow SBPC on Twitter @theSBPC.