NELP - State Law Provides an Untapped Route to Combat TRAPs and Other Coercive Contracts

Senior legal analyst Daniel Hanley provides comprehensive insight on the unfair practices of employers using non-compete agreements and TRAPs, and the advancements in the removal of these practices by the FTC.

Over the last 10 years, non-competes have increasingly drawn the attention of lawmakers and regulators—state and federal alike. Non-competes shackle workers to their employer and bar them from becoming employed at a competitor within a specified geographic area and time to obtain better wages and working conditions. Many states, like Minnesota, have recently banned or substantially restricted non-competes. The increased hostility toward non-competes has triggered strong opposition in the business and legal communities. In response, these parties have deployed other binding agreements on workers that operate as functional equivalents, with TRAPs being the leading contractual weapon.

Training Repayment Agreement Provisions, or TRAPs, operate similarly to non-competes as they effectively prohibit workers from leaving their employer because they must pay their employer for often arbitrary “training” costs. In many cases, TRAPs require a worker to pay their employer thousands or, in some cases, tens of thousands of dollars should they leave within a specified time for any reason. Whether the worker accepts a competitive position or becomes a stay-at-home parent, the mere act of leaving their employer imposes a debt, making these contracts more potent than traditional non-competes. This circumstance is particularly true given that a recent study by the Federal Reserve revealed that over 40 percent of the public cannot afford a $400 emergency expense. These coercive contracts are increasingly pervasive in the American economy, with one recent study detailing that TRAPs currently bind over eight percent of workers.

When TRAPs are involved, the “training” that employers provide to their workers is often of dubious value. In one notable lawsuit, BreAnn Scally, a former PetSmart groomer, was asked by her employer to pay $5,000 for training that merely included the employer training BreAnn to do the job she was hired to do and did not award her any accredited license or degree. It is clear that to properly effectuate bans on non-competes, TRAPs must also be banned—and the Federal Trade Commission (FTC) has made the most ardent effort to abolish these contracts.

The FTC issued a final administrative rule in April that prohibits all non-competes that restrict workers, including de facto non-competes like TRAPs nationwide. The FTC accomplishes this long-advocated policy by invoking its express rulemaking powers to prohibit “unfair methods of competition.” The rule is quite strong, but not perfect, as it concerns TRAPs. In general, the rule requires the FTC first to determine whether the contract unduly prohibits a worker “from seeking or accepting” alternative employment or starting a business. In other words, unlike traditional non-competes, the rule does not prohibit all TRAPs; a subset of ostensibly “reasonable” TRAPs would avoid condemnation. While the FTC can clarify the full force of how its rule applies to TRAPs through issuing guidance documents, it is the only entity that can enforce its rule, and the FTC faces real resource constraints.