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Stay-or-pay provisions have become a growing trend in American workplaces, closely resembling the restrictive nature of non-compete agreements.
At Gardner Employment Law, we have the legal expertise to assist you navigate a stay-or-pay provision in your employment contract. Read on to learn more.
What Are Stay-or-Pay Provisions?
Stay-or-pay provisions are contractual arrangements in which employees must pay back certain benefits if they leave their job voluntarily—or sometimes involuntarily—within a specified time. Companies frequently offer this up-front benefit to higher level employees who are highly sought after by competitors. We often see stay-or-pay arrangements in our cases representing executives.
Common examples include:
- Sign-On Bonus Repayment: Bonuses given upfront but subject to repayment if the employee resigns early.
- Quit Fees or Damages Clauses: Penalties imposing significant fees or require repayment for business costs if the employee leaves before a certain period.
- Relocation Expenses: Reimbursement to employers for the employee’s relocation expenses initially paid by the employer.
In many cases, the financial obligation can exceed the actual value of the benefit, thus discouraging workers from leaving. Indeed, employers grant these benefits up front to deter employees from leaving. The employer can still terminate the employee at will, absent a written contract provision protecting the employee from termination.
Employers may also apply these provisions without exceptions, sometimes for employees dismissed without cause. The uncertainty makes it difficult for workers to plan their careers or seek better opportunities elsewhere.
How Do Stay-or-Pay Agreements Affect Employee Rights?
Stay-or-pay agreements impact employees in several ways, particularly by limiting mobility and discouraging collective labor action. Below is an overview of key concerns:
| Impact | Description |
| Restricting Mobility | Financial penalties discourage workers from quitting, limiting better job opportunities. |
| Chilling Collective Activity | Employees avoid union organizing or advocating for better conditions, which often is a term that can trigger repayment. |
| Economic Pressure | Employees remain in roles due to fear of severe financial consequences if if they leave. |
| Job Insecurity | At-will employees face heightened risks, since some arrangements include termination without cause. |
These provisions add financial pressure to an already unstable dynamic, considering that the employer almost always has the upper hand. The stay-or-pay obligations increase the fear of both termination and deter any action toward workplace advocacy. Employees must weigh the risk of triggering these penalties against any potential benefit of switching jobs or engaging in collective action.
When Do Stay-or-Pay Agreements Cross the Line?
Employers typically argue that stay-or-pay provisions serve legitimate business purposes by promoting employee retention and recouping expenses, such as training costs. However, these justifications often conceal the coercive nature of these arrangements. Courts and labor regulators have raised concerns that such provisions can go beyond incentivizing retention to effectively trap employees in their roles by making it financially untenable for them to leave. This coercion can infringe upon employee rights under Section 7 of the National Labor Relations Act (NLRA), which protects the ability to engage in concerted activity or seek other employment without fear of punishment.
On October 7, 2024, NLRB General Counsel Jennifer Abruzzo issued a memo to all field offices, stating her position that these stay-or-pay agreements are unlawful because they chill employees from exercising their rights under Section 7 of the National Labor Relations Act. Quoting General Counsel Abruzzo:
Stay-or-pay provisions have serious potential for suppressing union organizing and other concerted activity for mutual aid or protection, including by impairing job mobility. Employers have used these provisions as coercive restrictors of employee mobility, which is not a legitimate business interest. I believe such provisions must be narrowly tailored to minimize that infringement on Section 7 rights in order to respect the rebalance of ‘economic power between labor and management’ Congress sought in passing the Act.
The issue becomes particularly problematic when the financial burden imposed is disproportionate between the company and the employee. For instance, requiring an employee to repay more than the actual value of a benefit received can amount to an unjust penalty. As mentioned, some employers require repayment even when the employee is terminated without cause, which shifts undue risk to the employee and creates financial insecurity. This adds an extra layer of complexity to the already precarious at-will employment relationship, where at-will employees already have little recourse if they are abruptly terminated.
Based on extensive research and nationwide investigation by the NLRB General Counsel, safeguards should be put in place to prevent excessive financial burdens to employees who accept these enticing benefits. The terms of the stay-or-pay agreement need to be carefully tailored to avoid excessive interference with employee rights. This includes ensuring that repayment amounts are tied to the actual value of the benefit provided, limiting the duration of the stay requirement to a reasonable period, and excluding repayment obligations for employees who are terminated without cause. Without these safeguards, such provisions are likely to be deemed unlawful by courts and regulatory bodies.
Contact an Expert.
Stay-or-pay provisions create a delicate legal balancing act. For workers, understanding the risks associated with these provisions is essential to making informed career decisions. Contact us at Gardner Employment Law with your questions today.