by Stephanie M. Gilliam and Jennifer L. Anderson
A recent Louisiana Court of Appeal decision reaffirms old lessons on employee loan agreements and when it’s inappropriate to make deductions from final paychecks for amounts owed to the company.
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Involuntary Termination Prevents Loan Forgiveness
A maintenance technician for a tank-cleaning services company in the oil and gas industry was required to sign a training loan agreement with his employer at the time of hire. The agreement stated the company would lend him $1,625 in training costs, paid in advance. If the employee worked for the company for at least 6 months following successful completion of the training, the loan would be considered paid in full and he would have no further obligations to the company.
But if he worked for the company for less than 6 months, he would have to repay a prorated portion of the training costs. He was employed at will, meaning he could resign at any time and the company could terminate his employment at any time for any lawful reason.
The employee completed the required training on January 30, 2015, meaning July 30, 2015, was the 6-month anniversary of successful completion of the training and the date the loan would be considered paid in full if he remained employed with the company.
On March 9, 2015—38 days after the employee completed the required training—the company terminated his employment. Since he had not worked for the company for at least 6 months following successful completion of the training, the company prorated the amount of his outstanding loan and offset the balance of $1,283.84 against his final paycheck, leaving him with a whopping final paycheck of $0.
The employee made a written demand for the amount deducted from his final paycheck. When the company refused his demand, he filed suit under the Louisiana Wage Payment Law, seeking unpaid wages, penalty wages, and attorneys’ fees.
Training Loan Agreement Violated Public Policy
The trial court ruled in favor of the employee, finding the training loan agreement violated Louisiana public policy. The company appealed, arguing the trial court relied on a previous court decision, Newsom v. Global Data Systems, Inc. (La. App. 3 Cir., Dec. 12, 2012), 107 So.3d 781, that was incompatible with the facts in this case.
Newsom, the court concluded that an employment agreement requiring at-will employees to reimburse their employer for education and training expenses after separation is against public policy and is therefore void. In Newsom, the employment agreement was open-ended and required the employee to reimburse the company for all expenses incurred for training and education during the previous 12 months of employment, regardless of the length of service.
In this case, the employer argued that the agreement in Newsom was different from its training loan agreement, which was for a short defined period of time and provided for forgiveness of the debt over that period. The appellate court was unpersuaded by the argument.
According to the court, in an at-will-employment relationship, taking a setoff is against Louisiana public policy unless it is for specific items such as personal loans, damage caused by the employee, lost equipment, uniforms, overpayment from a previous paycheck, or property that is improperly retained by the employee. (Note that this case addressed only Louisiana law, not the Fair Labor Standards Act (FLSA), which imposes additional considerations regarding setoffs and deductions.)
The general rule is that an at-will employee may quit at any time without liability being imposed on him for doing so. Any notion to the contrary is unreasonable. In Newsom, the court ruled that the agreement was void because it was against public policy. Withholding the employee’s last paycheck under the agreement was equivalent to imposing liability on him for leaving his job, thus restricting his freedom to resign.
In Newsom, noting the employee was employed at will. The court also noted that in order to secure employment, the employee was required to sign a loan agreement to reimburse the company for training expenses if his employment was terminated by either party for any reason in the 6 months following completion of the training.
The agreement put the company in a position to unilaterally terminate his employment at any point before the 6-month anniversary of the completion of the training and then demand reimbursement for the training because he did not work the full 6 months. The agreement essentially imposed liability on the employee because his employment was terminated by the company, which the court found to be against Louisiana public policy.
Unlawful Policy Precludes Good-Faith Defense
The company argued that even if it failed to pay wages owed to the employee, it should not be held liable for penalty wages based on a good-faith defense. The company argued that it relied on its policy, which was embodied in the training loan agreement and required amounts owed by employees to be deducted from their final paychecks.
Under Section 23:632(B) of the Louisiana Wage Payment Law, when a court finds that an employer’s dispute over the amount of wages owed is in good faith and that the employer owes the amount in dispute, the employer is liable only for the amount of wages in dispute plus judicial interest. But if the court determines the employer’s failure or refusal to pay the wages owed was not in good faith, the employer will be subject to penalties of up to an additional 90 days of wages.
The court concluded that reliance on an unlawful policy does not constitute a good-faith defense to liability for unpaid wages. The appellate court held that the training loan agreement was void because it was against public policy and that the company did not rely on it in good faith. Leprettre v. RCS, LLC, 16-382 (La. App. 3 Cir., Nov. 16, 2016).
Lesson: Get Advice Before Docking Pay
Deductions from employees’ pay can be tricky not only under Louisiana law but also under federal law, particularly the FLSA. Before you withhold any amount from an employee’s paycheck, consult with your employment lawyer. Failing to do so could result in an expensive lesson that likely will cost you far more than preventive legal advice.
Jennifer Anderson, a partner in Jones Walker’s labor relations and employment practice, can be reached in Baton Rouge at janderson@joneswalker.com or 225-248-2040. Stephanie M. Gilliam, an associate in Jones Walker’s labor relations and employment practice, can be reached in Baton Rouge at sgilliam@joneswalker.com or 225-248-2082. Gilliam is not admitted to practice in Louisiana.