On October 7, 2024, the General Counsel (“GC”) of the National Labor Relations Board (“NLRB”) issued a memorandum in which she opined that stay-or-pay provisions which require employees to repay expenses or bonuses upon termination of employment violate the National Labor Relations Act (“NLRA”) unless they meet a strict four-part test. The GC also instructed NLRB Regional Offices to prosecute employers who enter these types of agreements with non-supervisory employees, regardless of whether those employees are members of a union. The GC announced a 60-day “cure” window in which employers may take steps to revise any stay-or-pay provisions to comply with the four-part test and thus avoid prosecution by the NLRB. Although the GC’s memo does not have the force of law, employers may wish to consult counsel to assess the risk and consider whether to revise any such provisions before the expiration of the cure window on December 6, 2024.

What is Stay-or-Pay Provision?

Stay-or-pay provisions are agreements that require employees to repay money to their employer if their employment is terminated within a specific period of time. This could include agreements regarding repayment of training expenses or “claw-back” agreements connected to relocation stipends, signing bonuses, or retention bonuses that require an employee to repay money to their employer if employment is terminated before a certain date.

The GC believes these provisions restrict employee mobility by making it financially difficult or untenable for employees to quit their jobs. Additionally, she posits they dissuade employees from engaging in protected activity like union organizing or other concerted activity for mutual aid or protection. Consequently, the GC takes the position that these provisions infringe on the rights set out in Section 7 of the NLRA and constitute unfair labor practices.

Notably, Section 7 of the NLRA only protects non-supervisory employees. Therefore, stay-or-pay provisions in contracts with employees who meet the NLRA’s definition of “supervisors” should not be affected by this new memorandum.

The NLRB General Counsel’s Four-Part Test

The GC takes the position that any provision under which an employee must pay their employer if they separate from employment within a certain timeframe is presumptively unlawful, unless the employer can demonstrate that the provision advances a legitimate business interest and is narrowly tailored to minimize infringement on Section 7 rights by satisfying the following four-part test:

• The provision must be voluntarily entered in exchange for a benefit. Employees must be able to freely choose whether to agree to a stay-or-pay provision and must not suffer any adverse employment consequence if they decline. In addition, the repayment obligation must be in exchange for a benefit conferred on the employee. Notably, the GC opines that a sign-on bonus or relocation stipend with a claw-back provision is permissible only if it is truly voluntary, which means the employee has a choice between taking the payment immediately (with the repayment obligation) or receiving the payment at the end of the time period.
• There must be a reasonable and specific repayment amount. The repayment amount is reasonable when it is no more than the cost to the employer of the benefit they bestowed; and the repayment amount must be specified up front before the employee accepts the benefit.
• There must be a reasonable “stay” period. This is fact-specific and is based on the cost of the benefit, the value to the employee, whether the repayment amount decreases over the stay period, and the employee’s income.
• The provision must not require repayment if the employee is terminated without cause.

It is the GC’s position that a stay-or-pay provision must satisfy all four parts of the test to be valid.

The “Cure” Window

The GC has given employers 60 days (to December 6, 2024) to revise their existing stay-or-pay provisions and will not prosecute companies for pre-existing agreements if they make her suggested revisions, including:

• Disclosing the repayment amount.
• Reducing the repayment amount to match the cost of the benefit bestowed.
• Shortening an unreasonably long stay period.
• Amending the provision to make clear that the employee need not repay the amount if they are terminated without cause.

However, the GC announced that after this “cure window” closes, she intends to prosecute pre-existing stay-or-pay arrangements that have not been remedied. She also intends to prosecute any new stay-or-pay provisions entered after October 7, 2024 that fail the four-part test outlined above. Additionally, the GC announced that the NLRB may seek financial remedies to make employees whole.

What Does This Mean for California Employers?

The GC’s memorandum is not a new rule or law that employers must follow. Her position has not yet been adopted by the full NLRB or by the courts. Instead, the GC is instructing the NLRB Regional Offices to prosecute employers who use stay-or-pay provisions, and she is inviting the NLRB to conclude that such provisions violate the law.

Thus, the memorandum may generate new NLRB investigations and complaints, but we do not yet know whether judges, the NLRB, or the courts will agree that these provisions violate the NLRA. Unfortunately, this means employers are faced with some uncertainty about the practical impact of this memorandum; and each employer’s response to this new memorandum may depend on their own risk-tolerance level, the importance of stay-or-pay agreements to their business, and their existing or anticipated involvement with the NLRB.

Nevertheless, since the GC has outlined a method to “cure” these agreements and avoid NLRB prosecution, employers may wish to take the following steps to mitigate risk:

• Identify any agreements with stay-or-pay provisions.
• Assess whether these provisions satisfy the GC’s four-part test.
• Assess the risk and consider whether to revise the provisions in light of the GC’s guidance.
• Consider whether to continue to use new stay-or-pay provisions or alter them to align with the GC’s guidance.
• Exercise caution in requiring repayment under a stay-or-pay provision that does not meet the GC’s four-part test.
• Consult legal counsel for assistance.

If you have questions about how this new memorandum will affect your business or need advice about how to respond, please contact us.

• Katie M. McCray (kmccray@wilsonturnerkosmo.com)
• Lois M. Kosch (lkosch@wilsonturnerkosmo.com)

Wilson Turner Kosmo’s Special Alerts are intended to update our valued clients on significant employment law developments as they occur. This should not be considered legal advice.