The following is part of a Deep Dive series on how city, county, and state regulators and private citizens can take on TRAPs using existing authorities to protect workers. See an intro blog on the series here. It explains how city, county, and state labor officials can review TRAPs under existing wage-and-hour laws that prohibit employers from charging workers for the employers’ costs of doing business. In many instances, these regulators may find that TRAPs violate local laws and can move to protect workers from this abusive practice.
Author: Rachel Dempsey, July 17, 2024.
Jump to:
- Introduction
- Stay-or-Pay Contracts Frequently Violate Wage and Hour Law
- State and Local Enforcement
- Endnotes
Introduction
BreAnn Scally took a job at PetSmart so that she could follow her passion of working with animals. It seemed like a good deal: PetSmart offered her up to $6,000 of “free” training so that she could learn how to groom pets as an associate in a PetSmart salon.
But Scally soon found that her new job held a trap—or, more specifically, a Training Repayment Agreement Provision (TRAP), a common form of stay-or-pay contract that provides workers with training, often of dubious value, and then requires them to work for their employer for years in order to pay off the debt that their employers claim they owe for the training. In Scally’s case, she quickly realized that she could not support herself on her minimum wage salary, and that the heavy workload and lack of support from her supervisors was taking a toll on her mental health. She kept working for PetSmart for as long as she could, but seven months after she started, she quit. Three months later, she realized that PetSmart had sent her to collections when she noticed the derogatory mark on her credit report.
Stay-or-pay contracts operate as de facto non-competes, restricting workers like BreAnn Scally from seeking out better wages or working conditions. Research indicates that, as traditional non-competes face increasing regulatory scrutiny, employers are turning instead to stay-or-pay contracts to undermine worker mobility and bargaining power. Critically, and unlike traditional non-competes, stay-or-pay contract terms are triggered as soon as employment is terminated or the employee leaves, regardless of what employment, if any, they pursue in the future.
Stay-or-Pay Contracts Frequently Violate Wage and Hour Law⬆
Wage-and-hour laws are imperative tools to challenge TRAPs and other stay-or-pay contracts. Minimum wage laws like the Fair Labor Standards Act (FLSA) and its state equivalents don’t just require that employees receive a paycheck for at least the minimum wage every pay period. They also give this requirement teeth by preventing employers from taking a kickback from employee wages after the fact by attempting to recover business expenses from the employee. This includes purporting to recover a debt from the employee to pay for something that primarily benefits the employer. This is set forth in the FLSA’s implementing regulations at 29 C.F.R. § 531.35:
Whether in cash or in facilities, “wages” cannot be considered to have been paid by the employer and received by the employee unless they are paid finally and unconditionally or “free and clear.” The wage requirements of the Act will not be met where the employee “kicks-back” directly or indirectly to the employer or to another person for the employer’s benefit the whole or part of the wage delivered to the employee. This is true whether the “kick-back” is made in cash or in other than cash.
This regulation establishes a few key principles.
First, a kickback can’t be required – either in cash or other than cash. This means that employers cannot try to collect their costs of doing business from employees in the form of a debt. See, e.g., Rivera v. Peri & Sons Farms, Inc., 735 F.3d 892, 897 (9th Cir. 2013) (“[E]mployers generally may not issue paychecks at the minimum wage rate and then require employees to give some of the money back.”); Arriaga v. Fla. Pac. Farms, L.L.C., 305 F.3d 1228, 1236 & n.9 (11th Cir. 2002); Mayhue’s Super Liquor Stores, Inc. v. Hodgson, 464 F.2d 1196, 1199 (5th Cir. 1972).1
Second, if wages are not paid “finally and unconditionally or ‘free and clear,’” they “cannot be considered to have been paid” at all. 29 C.F.R. § 531.35; see also Fredericks v. Ameriflight, No. 23-cv-1757 (March 19, 2024). An unlawful kickback is a condition on wages: in effect, the employer is telling the employee that their employer might demand their wages back unless they stay in their job for a certain period of time. This means that a policy that pays wages subject to a stay-or-pay contract does not just violate the FLSA in the final pay period where the kickback actually occurs. It violates the FLSA in every pay period. Because the minimum wage is never paid free and clear, it “cannot be considered to have been paid” at all. 29 C.F.R. § 531.35.
State and Local Enforcement⬆
The Department of Labor (DOL) has brought at least two federal cases challenging TRAPs and other stay-or-pay contracts under the FLSA. In Su v. Advanced Care Staffing, Case No. 23-cv-2119 (E.D.N.Y. 2023), the DOL alleged that a nurse staffing agency that required employees to pay large sums in “lost profits,” arbitration costs, and attorneys’ fees unless they worked for at least three years showed “flagrant disregard” of the FLSA’s anti-kickback and free and clear requirements. And in Su v. Smoothstack, Inc., No. 24-cv.4789 (E.D.N.Y. 2024), the DOL sued an IT staffing company under the FLSA for use of a contract that charged workers for training costs, future lost profits, and administrative expenses if they left the company before billing 4,000 hours. The DOL described this practice as “akin to modern-day indentured servitude.”
While few state and local laws explicitly address TRAPs currently, state and local wage-and-hour law often echoes the FLSA in prohibiting employers from charging workers for the employers’ costs of doing business. For example, California Labor Code § 2802 requires employers to indemnify employees for all necessary expenditures incurred as a direct consequence of the discharge of their duties or in obedience to the directions of their employer. Compare this to Massachusetts General Laws c. 151 § 19(5), which prohibits employers from requiring employees to return a portion of their paid wages, leading to the same outcome: Employers cannot charge their employees for the employers’ costs of doing business.
Ultimately, most states would benefit from a clear law prohibiting the use of TRAPs and other stay-or-pay contracts. But in the meantime, regulators should review TRAPs through the prism of existing laws to limit their most egregious abuses.
Rachel Dempsey is an attorney at Towards Justice in Denver, CO. Her practice is focused on all forms of employee representation and advocacy, including litigating misclassification, wage theft, unfair competition, forced labor, and antitrust claims. Rachel is counsel for plaintiffs in TRAP cases against PetSmart, commuter airline Southern Airways Express, and IT staffing agency Smoothstack, among others. She graduated from Yale Law School and clerked on the Ninth Circuit and the Central District of California.
Endnotes: ⬆
- There’s some confusion on this principle in the Seventh Circuit due to the decision in Heder v. City of Two Rivers, Wisconsin, 295 F.3d 777 (7th Cir. 2002). There, the court, facing a challenge to a TRAP, held that an employer could withhold an employee’s wages in the final week of work, but only so long as the actual paycheck that the employee received did not dip below the minimum wage. Then, the employer would be entitled to “collect any residue as an ordinary creditor.” Id. at 779. This holding does not make sense in light of the principle that the FLSA prohibits kickbacks made “directly or indirectly . . . in cash or other than cash.” 29 C.F.R. § 531.35. Either a deduction is a kickback, in which case it is unlawful if it brings an employee’s effective pay rate below the minimum wage, or it is not a kickback, in which case the employer can recoup it however it sees fit; whether the deduction comes directly from a paycheck is immaterial. ↩︎