Employers Can Demand Departing Employees Repay Training Costs
February 4 2016
Training new employees is expensive. That is particularly true when an employer offers to pay for an employee’s educational training. The benefits of doing so include a more educated and well-trained workforce, as well as increased morale and employee loyalty. The risk, of course, is that an employee may decide to take his or her employer-funded education and use it to find another job somewhere else. Employers sometimes offset that risk by requiring the employee to sign an agreement to pay the employer back if he or she leaves for another job shortly after completing the education. But what if the employee refuses to pay? Is the repayment agreement enforceable? Yes, according to a California Court of Appeal.
USS-POSCO Industries v. Case involved the above scenario. Floyd Case entered into a voluntary three-year, employer-sponsored educational program that would allow him to become a Maintenance Technical Engineer (MTE). He signed an agreement with his employer, USS-POSCO, that he would repay a prorated portion of the education costs if he quit his job within 30 months of completing the program. Sure enough, two months after he finished, he quit. USS-POSCO asked him to pay back $28,000 of the $46,000 it spent on his educational training. Case refused, so USS-POSCO sued to collect the money. Case responded with a cross-complaint, claiming that his fingers were crossed when he signed the repayment agreement. Well, not really, but he did try every other argument his lawyer could imagine. He claimed the agreement was unenforceable for lack of consideration, that it was basically an unlawful non-compete agreement, and that it violated Labor Code provisions preventing employers from passing operating expenses on to employees and mandating that employers reimburse necessary employee expenses. Yes, the kitchen-sink defense.
The trial court rejected Case’s arguments and granted summary judgment in USS-POSCO’s favor on both the complaint and cross-complaint. The Court of Appeal affirmed both rulings. It denied his Labor Code claims because Case’s participation in the training program was voluntary, not mandatory, in that there were other alternatives to obtaining the promotion beyond entering the training program. For example, Case could have taken a test in lieu of the training program. The Court also rejected Case’s claim that the agreement was effectively a non-compete agreement because Case could and, in fact, did find another job. Makes sense, right? Finally, the court rejected the claim that the contract lacked consideration because Case obtained valuable training and wages in exchange for agreeing to repay if he left early.
Chalk this one up as a win for employers. Repayment agreements for employer-sponsored education programs are still enforceable. Well, usually at least. The Court of Appeal did distinguish this case from another line of cases, In re Acknowledgment Cases, in which the same Court denied the City of Los Angeles’ attempt to recover some employer-mandated training expenses from police officers who quit early. The key distinctions were that L.A.’s program was both mandatory and specific to the job, whereas USS-POSCO’s program was voluntary and the training was transferable to other jobs. So, here’s the takeaway: employers can require employees to pay back educational costs if the employee quits early, so long as the educational program was both voluntary and not specific to the employer’s operations.
I should also note that the case was only partially employer-friendly. There was one other component of the case involving attorney’s fees, and it went the other way. Labor Code section 218.5 used to provide that the prevailing party in a wage-and-hour lawsuit was entitled to fees. That statute was amended in 2014 so that, now, employers can only recover fees when the employee brought the claims in bad faith. The trial court granted USS-POSCO the fees because the case predated the amended version of section 218.5. But the appellate court through the award out, holding that the statute is to be applied retroactively. This means that employers must still show bad faith to get fees even if a lawsuit was filed prior to the 2014 amendment. That’s a tough break for any employers who are still defending older wage-and-hour cases.
Employers who wish to offer to pay for employees’ educational training should consider such agreements to protect themselves in the event the employees seek other jobs. Given the nuanced rule described above, employers should consult with their legal professional before drafting or implementing a repayment agreement.