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California Gov. Gavin Newsom recently signed into law sweeping legislation designed to restrict employers and training providers from requiring workers to repay costs or fees when they leave employment, so-called “training repayment agreement provisions” (TRAPs). The law, set to take effect Jan. 1[1], applies broadly to any person in California permitted to work for or on behalf of an employer or to participate in any other work relationship, job training program or skills training program, including employees and prospective employees.

Overview

The new law makes it unlawful for employers and affiliated entities[2] to include in an employment contract – or to require as a condition of employment – any provision that requires a worker to repay a “debt” if they resign from employment. A “debt” under the statute is defined as “money, personal property, or their equivalent that is due or owing or alleged to be due or owing … including, but not limited to, for employment-related costs, education-related costs, or a consumer financial product or service, regardless of whether the debt is certain, contingent, or incurred voluntarily.”

As a result, subject to certain exceptions, employers, training providers and debt collectors may not:

• Require a worker to repay a debt if their employment ends;
• Authorize the collection or resumption of a debt tied to the end of employment; or
• Impose any penalty, fee or cost[3] on a worker upon separation from employment.

Such restrictions constitute an unlawful restraint on trade because they prevent workers from engaging in a lawful profession, trade or business.

Exceptions

Notably, the statute exempts certain contracts from its purview, including:

• Loan repayment assistance or forgiveness programs provided by federal, state or local governmental agencies;
• Tuition repayment agreements for transferable educational credentials, if the contract:
• Is offered separately from any contract for employment;
• Does not require obtaining the transferable credential as a condition of employment;
• Specifies the repayment amount before the worker agrees to the contract, and the repayment amount does not exceed the actual cost to the employer;
• Provides for a prorated repayment amount and does not require an accelerated payment schedule if the worker separates from the employment; and
• Does not require repayment to the employer if the worker is terminated (except if the worker is terminated for misconduct);
• Contracts related to enrollment in approved apprenticeship programs;
• Repayment agreements related to discretionary, unearned signing bonuses, provided that:
• The repayment terms are set out in a separate agreement;
• The employee is notified to consult with an attorney and is provided at least five days to do so before having to sign the agreement;
• The retention period is two years or fewer;
• Any repayment obligation is prorated based on the remaining term of the retention period and is interest-free;
• The worker has the option to defer receipt of bonus until the end of the retention period; and
• The employee voluntarily resigned prior to the end of the retention period, or the employee was involuntarily terminated for misconduct before such time; and
• Contracts related to the lease, financing, or purchase of residential property.

Enforcement and Penalties

Non-compliant agreements will be regarded as unlawful restraints on trade in violation of California Business and Professions Code Section 16600, which prohibits restraining a person from engaging in a lawful profession. Additionally, employees aggrieved under the statute may initiate a private right of action against an employer to recover:

• The greater of actual damages or $5,000 per worker;
• Injunctive relief; and
• Attorney’s fees and costs.

Employers’ Next Steps

While the statute only applies to contracts entered into on or after Jan. 1, employers with employees in California should begin reviewing their agreements and related policies now to ensure they comply with the law, including, but not limited to:

• Training reimbursement agreements;
• Sign-on bonus and/or retention bonus policies or agreements; and
• Tuition repayment programs.

Miles & Stockbridge’s labor and employment lawyers are available to review employers’ agreements and ensure compliance by the statute’s Jan. 1 effective date.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.