New York Governor Signs Ban on Worker ‘Stay or Pay’ Requirements

Quick Hits

• New York’s “Trapped at Work Act” bans “stay or pay” agreements that require repayment of training costs if employees leave employment.
• The law applies to all workers, including employees and independent contractors, classifying repayment agreements for training costs as unconscionable and unenforceable.
• Employers may want to revise documents and agreements to ensure compliance, particularly regarding tuition assistance and training distinctions.

The “Trapped at Work Act” (Article 37, N.Y. Lab. Law §§ 1050–55), generally prohibits the use of “employment promissory notes” as a condition of employment or prospective employment. The law applies to “workers,” including employees, independent contractors, externs, interns, volunteers, and apprentices.

Promissory Notes Prohibited

Employment promissory notes are defined as agreements that require “a worker to pay the employer … a sum of money if the worker leaves such employment before the passage of a stated period of time,” including provisions that “payment of moneys constitutes reimbursement for training provided to the worker by the employer or by a third party.”

The law states that the “execution of an employment promissory note as a condition of employment is unconscionable, against public policy, and unenforceable, and any such note shall be null and void.”

The law does not provide an explicit private right of action, but employees may recover attorneys’ fees in cases in which they were sued by an employer to enforce an unlawful agreement. Further, the New York State Department of Labor can seek civil penalties ranging from $1,000 to $5,000 per violation.

Exceptions

The law explicitly does not apply to sums advanced to workers that are not used to pay for training costs, which could allow employers to require repayment of sign-on bonuses, retention bonuses, or similar non-training-related payments.

However, the law is not clear on the distinction between training costs and education expenses where education is closely aligned with employment duties such that it might be considered training. Employers may want to carefully draft tuition assistance programs and agreements, including those under Internal Revenue Code sections 127 and 132, to ensure compliance.

Agreements that require payment to the employer for property sold to the worker are also excepted. This should cover notes issued by employers for the purchase of restricted stock, to facilitate early exercise of options, and similar equity compensation arrangements.

The governor has reportedly reached an agreement with lawmakers to clarify educational expenses to allow for voluntary tuition assistance programs and clarify other ambiguities surrounding education assistance and other issues in the upcoming legislative session.

Next Steps

The New York prohibition on “stay or pay” agreements come amid a broader trend to restrict such agreements. Notably, California recently enacted its own prohibition on provisions in employment contracts that require the worker to repay an employer, training provider, or debt collector for a debt (such as training costs) if the worker’s employment ends.

Employers in New York may wish to review and update any offer letters, employment agreements, sign-on bonuses, retention incentives, training agreements, collective bargaining agreements, and onboarding documents that include repayment agreements. Employers may want to pay close attention to education reimbursement programs to distinguish general education from job-specific or required training. Employers providing tuition assistance programs might consider collaborating with their program vendors to ensure their plan documents, participation agreements, and other communications comply.

Unlike other legislation on this topic, the act does not grandfather existing agreements and is immediately effective. Accordingly, there may be legal challenges regarding what is essentially the retroactive application to agreements entered into before the passage of the law.

Ogletree Deakins’ New York offices and Employee Benefits and Executive Compensation Practice Group will continue to monitor developments and will provide updates on the Employee Benefits and Executive Compensation and New York blogs as additional information becomes available.

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