Deep Dive: When Employers Turn Employees into Consumers, State and Local Regulators Can Turn to Consumer Protection Law

The following is part of a Deep Dive series on how city, county, and state regulators can take on TRAPs using existing authorities to protect workers. See an intro blog on the series here. This SBPC Deep Dive explains how
state and local law enforcement and consumer regulators can prohibit TRAPs and other stay-or-pay contracts under existing consumer protection laws.

Authors: Khandice Lofton and Professor Jonathan Harris, July 31, 2024.

Jump to:

• Introduction
• Many TRAPs Are Consumer Products
• State Consumer Laws Already Protect Workers from TRAPs
• TRAPs May Also Violate Federal Consumer Laws
• Conclusion
• Endnotes

Introduction

When a worker advocate considers challenging a Training Repayment Agreement Provision (TRAP), the first thing that may come to mind is invoking employment law protections. However, consumer laws offer a practical approach to reining in TRAPs. For example, a court determined that a TRAP for a trucking company, CRST, violated the Iowa Consumer Frauds Act.¹ CRST told aspiring truck drivers that the tuition for the driving school was $6,500, owed to the trucking company, when CRST in fact had paid only between $1,400 and $2,500 per student to the driving school. In addition to that falsification, the TRAP included a requirement that the drivers would work for CRST for ten months after “graduating” or owe the $6,500.² Moreover, the court held that CRST’s debt collection letters that threatened to charge an 18 percent interest on the TRAP debt could constitute a violation of the state’s usury law which prohibits charging exorbitant interest rates. The CRST case offers a case study of how existing consumer protection laws provide workers a viable route to relief in addition to employment law.

Indeed, employment and consumer law do not have to be mutually exclusive. The two laws can engage with each other to invalidate TRAPs and keep employers from exploiting loopholes to evade liability.³ By requiring workers to take on arbitrary and egregious debt for dubious training, employers are treating their employees like consumers and should answer to state and federal consumer laws. Employment should never create debt, and it is important that lawmakers and law enforcement agencies send that message to employers.

Many TRAPs Are Consumer Products

Employers are using TRAPs as a way to lock workers into debt to prevent departure. The justification for this debt? On-the-job training for personal growth, regardless of its quality. Essentially, employers are treating their workers as if they are purchasing the training for personal use on credit. Workers are expected to satisfy the debt by staying on the job for a prescribed amount of time or by reimbursing their employer for the cost of training them. If the job conditions are unbearable, the workers are stuck between continuing to be miserable for another two or more years or leaving and paying thousands of dollars. Even worse, if they cannot afford to pay a lump sum, they could be subjected to a lawsuit to collect or have their credit ruined. 

In come consumer laws. Consumer protection laws came into existence because of exploitation in the workplace. In the early 1900s, Upton Sinclair’s The Jungle exposed the meatpacking industry for its unsanitary conditions and horrendous working conditions that harmed both consumers of the meat and employees in the industry. As a direct response to this muckraking journalism, the nation passed its first consumer laws. These consumer laws, particularly unfair and deceptive acts and practices (UDAP) laws, have been on the books now for a century in most states and have historically been useful tools to protect workers as consumers and workers as workers.

As companies sell their own workers goods and services purportedly for personal, household, or family use, consumer laws offer hope to exploited workers who are let down by traditional employment and labor laws.⁴ Indeed, employers selling financial products and services to their employees is not new. Over a century ago, companies sold their workers life insurance products and later health insurance and retirement products. Moreover, employers have offered credit-based financial products to their employees, including pay advance services and personal loans.⁵

When an employer chooses to blur the line of the employer-employee relationship into creditor-debtor, the employees should benefit from consumer laws in addition to traditional employment laws. This is what one of us has called Consumer Law as Work Law.⁶ Employers cannot create a gray area to straddle between consumer and employment law to escape liability under either law’s reach. That is, by arguing that the training is not for personal use, and therefore consumer law should not apply, employers admit that the training is for their own use. In such a case, employment laws prohibit employers from charging the training costs to the worker. Employers should not be allowed to have their cake and eat it, too. State and local policymakers can prevent this attempt to evade liability by explicitly prohibiting TRAPs in state and local law.

State Consumer Laws Already Protect Workers from TRAPs

Several state consumer laws already provide protections against TRAPs that state and local offices should begin enforcing today. There are state laws that prohibit unfair deceptive acts and practices (UDAPs) while conducting a consumer transaction, debt collection laws that prohibit predatory debt collection practices, and state usury laws that prevent charging excessive interest in transactions. Each type of law is discussed below, as well as examples of how these laws apply to TRAPs or can be modified to apply in the future.

State and Municipal UDAP Laws

Every state has enacted a consumer protection statute, often referred to as a UDAP law, that protects individuals from certain unlawful actions while conducting a consumer transaction.⁷ These laws prohibit deception and many include unfairness, among other wrongful actions, to ensure reasonableness and transparency during a transaction. Several of these laws already incorporate definitions and provisions that could effectively prohibit TRAPs. TRAPs often involve employer conduct that includes deceit and unfair terms, making them the exact type of contract UDAP laws were meant to prohibit. Many state and local UDAP laws reference Section 5 of the Federal Trade Commission (FTC) Act as a guidepost for how the laws should be interpreted and also allow local and state regulators to adopt rules. In fact, these are known as “little FTC Acts” because the FTC encouraged states to enact them in the 1960s and 70s.⁸ These state and local UDAP protections may also apply to certain employment-related transactions that restrain worker mobility and raise similar concerns to non-compete agreements.

One example of this is the Virginia Consumer Protection Act (VCPA). This law includes six types of covered consumer transactions, including ones that “involv[e] the advertisement, offer or sale to an individual of goods or services relating to the individual’s finding or obtaining employment.”⁹ The VCPA enumerates over 70 unlawful acts that will invalidate a consumer transaction, such as the use of deception, false promises, or even using a liquidated damages provision in an agreement. In a pending lawsuit, the Student Borrower Protection Center, along with its co-counsel, alleged VCPA violations against an IT staffing agency named Smoothstack.¹⁰ The claims allege that Smoothstack violated the VCPA by using and attempting to collect on a liquidated damages clause—a TRAP—in connection with its training and job placement services. The complaint also alleges that Smoothstack misrepresented the quality and actual cost of the training and falsely promised lucrative jobs with Fortune 500 companies, while charging workers tens of thousands of dollars for leaving their job.

Earlier this year, the state of Colorado strengthened its UDAP protections for employees by amending its consumer protection law to explicitly prohibit unfair and deceptive use of TRAPs.¹¹ The law now includes within the definition of “consumer credit sale” contracts that require employees to pay employers for education and training expenses upon termination of their employment (a TRAP).¹² The definition of a “consumer loan” was modified to include the “recoverable expense of training and educating a worker,” an important inclusion to strengthen the claims that can be made against TRAPs through consumer law.¹³ The law also grants the attorney general enforcement authority and permits an aggrieved worker to recover treble damages, in addition to a $5,000 penalty and other fees and costs. The law excludes “specialized” training, so employers may attempt to argue that their training is specialized. However, it is the employer’s burden to prove their training is more than the typical on-the-job training. While not a complete ban, Colorado’s recent act is an example that those with rulemaking authority should examine when expanding their consumer laws to include TRAPs. 

Municipal UDAP laws may also provide local governments with the ability to protect workers. For example, Chicago’s Consumer Protection Act, which prohibits “any act of consumer fraud, unfair method of competition, or unfair or deceptive act or practice” permits the Commissioner of Business Affairs and Consumer Protection to adopt rules to protect the public.¹⁴ This authority could be used to outlaw TRAPs and put rules in place that restrict other forms of “stay-or-pay” agreements that require workers to pay to leave.

State Debt Collection Laws

If an employer enforces a TRAP and attempts to collect on the debt, especially when using a third-party debt collector, the employer could also be subject to debt collection laws. Unlike UDAP laws, not all states have implemented strong debt collection protections.¹⁵ For example, Illinois and California prohibit many forms of abuse, harassment, and deception when attempting to collect a debt, going as far as setting parameters on the times of day when a debt collector can call a person.¹⁶ States should set clear parameters like this so that it is clear when that standard is violated. In general, many state and local lawmakers need to propose these types of standalone debt collection laws or amend current consumer protection laws to include stronger safeguards against abusive debt collection practices. 

State Usury Laws

Usury laws prevent parties from charging unreasonably high interest or exceeding an interest rate limit set by the state. State and local regulators may find that TRAPs and other forms of stay-or-pay contracts violate their usury laws. Some states have particularly strong usury laws, such as Pennsylvania, where it is a crime to charge more than 6 percent interest for loans of $50,000 or less.¹⁷ Many employers include exorbitant interest rates in their TRAPs and courts may find that those interest rates are prohibited by its state usury laws, like Iowa in the CRST case mentioned above.

TRAPs May Also Violate Federal Consumer Laws

In addition to these state consumer protection laws, state and local enforcement should look to  federal consumer protection laws that they can enforce. This includes the Dodd-Frank Wall Street Reform Act and Consumer Protection Act, which prohibits unfair deceptive abusive acts and practices when conducting a consumer transaction;¹⁸ the Fair Debt Collection Practices Act, which prohibits unfair practices when attempting to collect a debt from a consumer;¹⁹ the Fair Credit Reporting Act, which governs access to consumer credit report records and even more importantly, promotes accurate and fair credit reporting;²⁰ and the Truth in Lending Act, which requires lenders to provide accurate information regarding a loan so that the borrower can make an informed decision.²¹

Conclusion

State and local government actors have plenty of avenues by way of consumer law to hold employers accountable for using TRAPs and treating workers unfairly. Lawmakers, regulators, and worker advocates must take action against TRAPs using the laws that are already at their disposal. As the U.S. Department of Labor recently stated in its complaint against Smoothstack, many TRAPs are akin to “modern-day indentured servitude,” and they must be stopped.²²

Jonathan F. Harris (he/him/él) is an associate professor of law at LMU Loyola Law School Los Angeles and Senior Fellow at Student Borrower Protection Center. He writes and speaks on work law and contracts, worker mobility, and workforce development.

Khandice Lofton is Counsel at Student Borrower Protection Center. She focuses on litigation involving TRAPs and other consumer issues.

Endnotes: ⬆

1. https://www.fairworklaw.com/news/federal-judge-rules-against-crsts-driver-training-program/ ↩︎
2. Id. ↩︎
3. https://ssrn.com/abstract=4172535 ↩︎
4. https://www.epi.org/blog/when-corporations-deceive-and-cheat-workers-consumer-laws-should-be-used-to-protect-workers/ ↩︎
5. https://www.consumerfinance.gov/about-us/newsroom/cfpb-proposes-interpretive-rule-to-ensure-workers-know-the-costs-and-fees-of-paycheck-advance-products/ ↩︎
6. https://ssrn.com/abstract=4172535 ↩︎
7. https://www.nclc.org/wp-content/uploads/2022/09/UDAP_rpt.pdf ↩︎
8. https://ssrn.com/abstract=4824457 ↩︎
9. https://law.lis.virginia.gov/vacodepopularnames/virginia-consumer-protection-act/ ↩︎
10. https://storage.courtlistener.com/recap/gov.uscourts.vaed.536736/gov.uscourts.vaed.536736.79.0.pdf ↩︎
11. https://statebillinfo.com/bills/bills/24/2024a_1324_signed.pdf ↩︎
12. Id. ↩︎
13. Id. ↩︎
14. https://codelibrary.amlegal.com/codes/chicago/latest/chicago_il/0-0-0-2597167 ↩︎
15. https://www.justia.com/debt-management/creditor-collection-methods/fair-debt-collection-laws-50-state-survey/ ↩︎
16. Id. ↩︎
17. https://www.legis.state.pa.us/WU01/LI/LI/US/PDF/1974/0/0006..PDF ↩︎
18. https://www.congress.gov/111/statute/STATUTE-124/STATUTE-124-Pg1376.pdf ↩︎
19. https://www.ftc.gov/legal-library/browse/rules/fair-debt-collection-practices-act-text ↩︎
20. https://files.consumerfinance.gov/f/documents/bcfp_consumer-rights-summary_2018-09.pdf; https://www.ftc.gov/legal-library/browse/statutes/fair-credit-reporting-act ↩︎
21. https://www.consumerfinance.gov/compliance/supervision-examinations/truth-in-lending-act-tila-examination-procedures/ ↩︎
22. https://protectborrowers.org/department-of-labor-sues-smoothstack-traps/ ↩︎