This month’s expert is
Laura E. Innes, an attorney with the law firm of Simpson, Garrity & Innes
in
Training new and
inexperienced employees can be tremendously expensive. The costs include the time
experienced employees spend mentoring their less-experienced colleagues, wages
and benefits paid to employees before they become truly productive, training
programs purchased from outside vendors, and more.
Outlays on training
inexperienced employees are an investment in the human capital of your
business. But that investment will be lost if the trained employee resigns to
work for another employer before you can realize the profit your investment
should bring. To avoid these losses, some employers require an employee who
resigns to repay part or all of the training cost, by requiring employees to
sign either an employment agreement with a reimbursement provision or a
promissory note equal to the value of training to be provided. Chances are,
though, these agreements aren’t legal.
The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.
Legal Challenges
The first
this type of agreement that received much press involved a class action suit
filed against Dean Witter Reynolds in 1987. The suit challenged Dean Witter’s
training agreement specifying that a stockbroker who quit before his or her
two-year commitment ended and joined a competitor firm would owe $28,545 in
damages. The employees alleged that the training agreement violated federal and
competition law. The case dragged on for 10 years before it was settled, with
Dean Witter agreeing to pay $1.8 million.
No Kickbacks
More recently, a 2005
opinion letter1
from the
U.S. Department of Labor (DOL) stated that requiring reimbursement of internal
training costs violates the Fair Labor Standards Act (FLSA). That’s because the
FLSA requires that employees be paid for all hours worked, which includes basic
training time. What’s more, the FLSA requires that wages must be paid finally
and unconditionally— or what’s known as “free and clear.” When the employee
must “kick back” all or part of his or her wages to the employer, the wages
aren’t free and clear.
In addition, the U.S.
Supreme Court has ruled that an employee may not waive rights to compensation
due under the FLSA. Thus, an employee’s agreement to give wages back, in
writing, isn’t valid or enforceable.
Furthermore, the court
has held, a labor organization may not negotiate a provision that waives
employees’ FLSA rights.
Like the FLSA, the
California Labor Code (Section 221) bars an employer from collecting or
receiving from an employee any part of wages previously paid by the employer to
the employee. Penalties may be assessed against any employer who requires or
accepts kickbacks from employees.
Posting Bonds Not
Allowed
The Labor Code also
prohibits employers from requiring employees to post bonds, except in limited
circumstances. Under these provisions, a promissory note is “property” put up
as a bond.
Although these Labor
Code bond provisions haven’t been tested with respect to training reimbursement
agreements, a
case involving a similar bond law may be instructive. The employee had received
extensive training from his employer in repairing appliances, a field in which
he had no prior experience. The employee agreed to repay some of those training
costs if he left the company within three years, which he did. When he refused
to pay, the employer sued to recover $6,500 in training costs.
The Michigan Supreme
Court ruled that the training reimbursement agreement violated a state law that
prohibited requiring an employee to put up a bond as security to complete a
specific period of employment. According to the court, a training reimbursement
agreement based on a specific period of employment violated the plain language
of the statute.2 As the California and
bond laws are similar, it’s not too far a stretch to believe that a
interpret the Labor Code provision in the same way.
Practical Advice
Fortunately for
employees’ lawyers so far haven’t been zeroing in on training reimbursement agreements.
Wage and hour litigation in general, however, is now a huge focus, and
employers that require employees to reimburse them for the costs of training
could be attractive targets for class action litigation. Thus, before
implementing or continuing such policies and practices, it’s a good idea to
consult your employment attorney.
_
1
FLSA2005-18
2 Sands Appliance
Services v. Wilson, 463
231, 2000