What is a Stay or Pay Clause?

Non compete clauses have long been illegal in California, and as of 2023, the federal government passed a regulation making these provisions illegal nationally (although that restriction is currently being challenged in court).

But anticipating the trend against these clauses, many employers are coming up with new ways to try to keep employees from leaving, or at least, to make it harder for employees to find new work after their employment ends: They’re called stay or pay clauses.

Reimbursing Training Expenses

On the surface, all a stay and pay clause says is that if an employee stops working for an employer within a specified period of time the employee will have to reimburse the employer for the costs associated with the training and onboarding of the employee.

But what these clauses have really become, especially in a post-non-compete age, is kind of a noncompete agreement, without actually being called one.

The stay or pay clause often has punitive terms, requiring employees to pay back way more than what it cost the employer to train and hire the employee. The point is not to reimburse, as it should be, but to dissuade the employee from leaving, or else, to give the former employer power over the employee.

How Courts Treat Them

Some courts see these clauses as illegal restraints on trade, in that they discourage employees from leaving their jobs to find new, and often better, work. The federal government has written that these clauses force employees to stay in jobs they don’t want, and turn employees into debtors of their employers—debt that can drive some into bankruptcy, if the debt is high enough.

But other courts see training expenses incurred towards training a new hire as a loan, and the stay or pay clause is simply an agreement by the employee to pay back that loan, should employment ends.

Are They Banned?

The Federal Trade Commissions’ 2023 ban on noncompetes did also note that these stay and pay clauses restrain trade, and as such, are included in the ban on non compete agreements—at least in their eyes. Whether courts will see it that way, is another matter.

An Employment Contract?

Whether these clauses will take hold and become more common as time goes on, remains to be seen. The problem, from an employer’s standpoint, is that a stay and pay clause is usually included in a larger contract. An employment contract means that an employee may no longer be an at-will employee—the employer may lose the right to just get rid of an employee whenever the employer wants.

That alone could discourage the use of these clauses.

There are also numerous California state laws that may restrict the ability of an employer to require an employee to reimburse the employer for training expenses.

Is your employer making you sign a stay or pay clause? Contact the San Jose employment law and discrimination attorneys at the Costanzo Law Firm.

Source:

natlawreview.com/article/should-i-stay-or-should-i-go-federal-regulators-and-employers-may-face-impending