States Tackle ‘Stay-or-Pay’ Contracts as Federal Efforts Wane

Opposition to employers’ use of “stay-or-pay” contracts has gotten traction in state legislatures this year, led by California and New York, as federal regulators retreat from efforts to rein in the agreements nationwide.

California recently enacted one of the country’s strictest bans (AB 692) on employment-related debt imposed on workers, effective for employment contracts signed on or after Jan. 1, 2026. Similar legislation in New York (A584C) is awaiting Gov. Kathy Hochul’s (D) signature.

The bans aim to prevent employers using contracts such as training repayment agreements—sometimes called TRAPs—that can discourage workers from changing jobs. Federal agencies including the Federal Trade Commission and National Labor Relations Board have largely dropped their attempts to regulate these contracts in President Donald Trump’s second term, including the FTC’s ban on noncompetes that also would have applied to some repayment pacts.

Business advocates say the contracts often legitimately protect employers’ investment in training new hires by discouraging them from quickly leaving and taking their new skills to a competitor. But critics, including former Biden administration officials, say the agreements can be predatory toward workers and are even illegal under existing state and federal laws.

The contracts often are “used as cynical means to work around bans on traditional noncompetes and try to keep the worker from being able to afford to leave,” said Jonathan F. Harris, a law professor at Temple University.

Laws regulating these contracts look set to spread, with blue states passing more expansive restrictions as they’ve done for noncompetes and red states passing narrower legislation perhaps targeted at specific occupations, he said.

Indiana, for example, this year expanded its law (SB 475) limiting physician noncompetes to set limits on hospitals requiring doctors to repay training and other expenses when they leave their jobs. Wyoming enacted similar restrictions for all industries as part of a broader noncompete law (SF 107).

Litigation Risk

Stay-or-pay contracts typically require employees to repay their employer for training expenses, new-hire bonuses, or other costs if they leave the job within a certain time period, often two or three years. The contracts have come under public scrutiny in the last few years, partly thanks to a former dog groomer’s 2022 lawsuit against PetSmart over an agreement requiring her to repay more than $5,000 in training expenses when she left after less than a year on the job.

California Attorney General Rob Bonta published a legal alert in 2023 warning employers that employment-driven debt contracts could violate existing labor and consumer protection laws, and noted their frequent use in the health care, trucking, aviation, retail, and service industries.

Earlier this year, HCA Healthcare Inc. agreed to pay $2.9 million to settle allegations by the AGs of California, Colorado, and Nevada that it was imposing illegal training repayment contracts on the hospital chain’s nurses.

The new California law more explicitly bans employment-related debt contracts, while allowing exceptions such as employers recouping the tuition paid for an employee to earn a transferable professional credential under certain conditions.

California employers risk potentially expensive class-action lawsuits if they don’t evaluate and stop using repayment pacts that fall outside of the exceptions by Jan. 1, said Dana A. Kravetz, managing partner for Michelman & Robinson LLP in Los Angeles.

The new law “lends itself to class claims. It lends itself to an increase in litigation,” he said. “It’s another type of claim that I imagine the plaintiff’s bar will go after.”

A similar but somewhat less restrictive Colorado law also contains a private right of action, whereas the New York legislation tasks the labor commissioner with enforcement.

California businesses might find they can restructure certain kinds of repayment contracts such as those related to employee bonuses, but others will be tough to salvage under the new law, said Kristina M. Launey, a partner at Seyfarth Shaw LLP in Sacramento.

“The training ones are the most difficult to address,” she said. “I think you will see employers’ payment for those programs go away.”

Federal Efforts

At least three federal agencies previously targeted employer-driven debt contracts to prevent uses that they argued could be illegal, until Trump’s return to the White House in January.

The FTC’s 2024 rule banning employee noncompetes was expected to cover training repayment agreements in instances where they restricted worker mobility. But the FTC this year dropped its defense of the rule in court, after two federal judges blocked its enforcement.

The NLRB took its first enforcement action against stay-or-pay contracts in November 2024, following the general counsel’s memo finding the contracts violate workers’ rights under the National Labor Relations Act. The Trump administration’s NLRB acting general counsel, William Cowen, rescinded that memo along with several others carried over from Biden’s presidency.

The Consumer Financial Protection Bureau said in 2023 it was teaming up with the NLRB to crack down on illegal uses of stay-or-pay contracts. But Trump’s efforts to lay off much of the CFPB’s staff have left the agency with limited enforcement bandwidth, and Bonta noted the agency wasn’t involved in the HCA settlement after previously participating in the investigation during the Biden administration.

“These bills in California and elsewhere come at a time when there’s an alarming rollback of federal efforts to protect workers from TRAPs and stay-or-pay contracts,” said Chris Hicks, senior policy advisor at the advocacy group Protect Borrowers.

Connecticut has banned employers with more than 25 employees from imposing job-related debt on their staff since 1985. Since then, state policymakers hadn’t given much attention to the issue until Colorado enacted restrictions on employers’ use of the contracts in 2022, following up with additional restrictions in 2024 (HB 24-1324).

Minnesota is a prime candidate to pass similar restrictions on TRAPs, as worker advocates there are concerned employers might be using the contracts more frequently as an alternative to noncompetes, after the state banned most noncompetes in 2023, Hicks said.