Coercive Contracts

Beware the fine print in employment contracts!

Federal agencies have been working to protect workers from unfair employment agreements imposed by employers as a condition of getting or retaining a job. This month, the spotlight is on such efforts led by the top lawyers at the U.S. Department of Labor and the National Labor Relations Board.

In mid-October, Solicitor of Labor Seema Nanda issued a special enforcement report identifying types coercive employment contracts that her office has been working to oppose and prevent. Earlier in the month, National Labor Relations Board General Counsel Jennifer Abruzzo issued a memorandum urging stronger enforcement against and broad remedies for certain coercive employment contracts.

Particularly in workplaces where workers are not represented by a union, workers have been required to agree to contractual terms that disadvantage them, undermine their rights under employment laws, and deter them from enforcing their rights. Types of such “gotcha” agreements that Ms. Nanda and Ms. Abruzzo have targeted are noted below. Workers should be aware of these potential traps.

Waivers of rights under laws protecting workers

Generally, protections of workers under labor and employment statutes are not waivable. For example, under the Fair Labor Standards Act (“FLSA”), an employee’s rights to payment of minimum wages and overtime and recovery of liquidated (doubled) damages cannot be contracted away. Nor can the deadline for filing an FLSA lawsuit (which is two years normally but expanded to three years in the case of willful violations).

Yet some employers have required workers to sign agreements containing provisions purporting to waive workers’ rights to file lawsuits or recover damages under the FLSA. Such provisions might require a worker to agree to a shortened time limit for filing a lawsuit and to give up entitlement to liquidated damages if successful.

Agreeing to “independent contractor” status

Labor and employment laws typically omit independent contractors from the rights and protections under those laws. Some employers try to avoid compliance with labor and employment laws by misclassifying workers as independent contractors. These employers may require workers to sign agreements claiming the workers are independent contractors.

Such agreements do not remove a misclassified worker’s protections as an employee under the law. However, a misclassified worker may not know this and, as a result, avoid seeking legal help for violations of the worker’s rights.

Indemnification agreements

As a way of discouraging workers from reporting them or taking legal action against them, some employers have included in employment agreements terms that require a worker to pay the employer for any costs and expenses (including legal fees and damages) spent by the employer in defending against a claim brought by the worker.

The Solicitor of Labor has successfully argued in court cases that employers cannot seek indemnification or contribution from employees—including offsetting wages due to employees—for the employer’s liability under the FLSA.

“Loser Pays” provisions

Contractual terms purporting to require a worker to pay an employer’s attorney fees in the event the employee sues the employer and loses the lawsuit. The intent and effect of these loser-pay provisions is to deter the worker from taking legal action against the employer to enforce the worker’s rights.

Agreements requiring losing workers to pay their employer’s attorney fees are not authorized under the FLSA, which allows winning workers, but not winning employers, to be awarded attorney fees. The same is true of the Age Discrimination in Employment Act, the Family and Medical Leave Act, and the Uniformed Services Employment and Reemployment Rights Act. Under other employment laws, such as Title VII of the Civil Rights Act of 1964, a losing worker may be liable for an employer’s attorney fees but only if the worker’s suit were frivolous, unreasonable, or without foundation.

Stay-or-pay provisions

“Stay or pay” contract clauses require workers to pay their employer if they leave employment—whether voluntarily or involuntarily—before working for the employer for a set length of time. Such stay-or- pay provisions may attempt to make a worker liable for the cost to replace the worker, lost profits of the employer, and the cost of training provided to the worker. By creating a financial obstacle to leaving a job, such a provision may cause a worker to stay in a job where the employer is violating worker-protection laws because the worker cannot afford to quit.

Stay-or-pay clauses can violate an FLSA prohibition on requiring workers to pay “kick back” wages—payments that bring a worker’s wages below the required minimum wage or overtime pay.  Wages may not have strings attached but, rather, must be paid finally and unconditionally. However, there may be an exception when a cost is primarily for the worker’s benefit, such as a college course or degree that would be transferable or useful in another job.

Contracts requiring workers to pay their employer if they leave employment within a given period can also violate the National Labor Relations Act (“NLRA”). Ms. Abruzzo noted that stay-or-pay requirements restrict employee mobility by making resigning from employment financially difficult or untenable and chilling employees from engaging in activities protected by the NLRA to better their working conditions. Protected activities likely to be chilled by stay-or-pay requirements include organizing a union, collectively advocating for improved working conditions, and concertedly with other employees threatening to quit if improvements are not made.  

Ms. Abruzzo intends to urge the National Labor Relations Board to hold that any provision under which an employee must pay an employer if the employee separates from employment within a certain timeframe, whether voluntarily or involuntarily, is presumptively unlawful under the NLRA.

An employer could rebut such presumption by proving that the stay-or-pay requirement advances a legitimate business interest and is narrowly tailored to minimize infringement on employees’ NLRA-protected rights, Ms. Abruzzo said. Specifically, the employer would have to show that the stay-or-pay provision:

1. was voluntarily entered into in exchange for a benefit;
2. has a reasonable and specific repayment amount;
3. has a reasonable “stay” period; and
4. does not require payment if the employee is terminated without cause.

Ms. Abruzzo is allowing employers until December 6, 2024, to bring preexisting stay-or-pay provisions into compliance with the above standards.

Non-compete agreements

Non-compete agreements prohibit employees from accepting particular types of jobs and engaging in certain kinds of business after their employment ends. Last year, Ms. Abruzzo issued a memorandum stating that the proffer, maintenance, or enforcement of non-compete provisions violates the NLRA, except in limited circumstances. Following up, Ms. Abruzzo recently issued a memorandum urging broad remedies to compensate workers harmed by unlawful non-compete requirements.

Workers should be allowed to demonstrate that they were deprived of a better job opportunity due to a non-compete provision, Ms. Abruzzo said. Specifically, workers would need to show:

1. there was a vacancy available for a job with a better compensation package;
2. they were qualified for the job; and
3. they were discouraged from applying for or accepting the job because of the non-compete provision.

Workers making this showing would be entitled to payment from their employer of the difference (in terms of pay or benefits) between what they would have received and what they did receive during the same period.

Former employees who show they were out of work longer than they otherwise would have been as a result of a non-compete requirement would be eligible for payment of the wages they lost during the non-compete period.  Such persons would need to show there was a position available for which they were qualified but they were discouraged from applying for or accepting the position due the non-compete requirement. If former employees accepted a lower-paying position outside their industry but within the geographic scope of a non-compete provision, they would be eligible to receive the difference in pay for the duration the restriction was in effect. Moreover, employees who move or incur retraining expenses may be entitled to recover moving or retraining costs.

Confidentiality, non-disclosure, and non-disparagement clauses

Confidentiality, non-disclosure, and non-disparagement provisions that restrict employees from communicating with government agencies generally are unenforceable. Such requirements chill employees from filing complaints against their employers and cooperating in investigations. Ms. Nanda noted that although provisions limiting the workers’ ability to communicate with the Labor Department are not enforceable, employers still insert such provisions in employment, separation, and severance agreements.

Ms. Nada’s office is working closely with the Labor Department’s enforcement agencies to combat such provisions and has filed a lawsuit to stop an employer from imposing broad confidentiality provisions on current and former employees. Her office also submitted a brief to the National Labor Relations Board arguing that overly broad confidentiality agreements undermine worker protections and enforcement schemes of employee-protective laws.

Requiring reporting safety issues to the employer first

Provisions requiring employees to report safety concerns to their employer first instead of to a government agency can chill employees from voicing their concerns. Ms. Nanda’s office and the Occupational Safety and Health Administration have taken a stand against employers who retaliate against workers who report safety concerns or other violations to government agencies before reporting them to their employers.

While such retaliation can be unlawful under federal law, the same would not be true under Florida’s private-sector whistleblower statute.  The Florida statute does not protect the reporting of an employer’s violation of law to a government agency unless the employee has brought the matter to the employer’s attention in writing and allowed the employer a reasonable opportunity to correct the problem.

How might the election affect enforcement activity?

The federal laws protecting workers won’t vanish with a change in presidential administrations. However, the level of federal agencies’ commitment to protecting workers by enforcing or administering labor and employment laws can vary from administration to administration, sometimes markedly when the party affiliation of the presidency and agency leadership changes. Sometimes, interpretations of certain worker rights adopted by one administration have been tossed by a new administration and later resurrected by a different administration.

Regardless of which candidate wins the presidential election, Ms. Abruzzo and Ms. Nanda are expected to remain in their positions and continue their agendas until next summer. Both women were President Joe Biden’s choices for their respective positions and are serving four-year terms that expire in July 2025.

Of the types of coercive employment contracts targeted by Ms. Abruzzo and Ms. Nanda, non-compete clauses are the most controversial. Whether non-compete agreements should be banned or permitted is a hot issue, not just at the NLRB. In April, the Federal Trade Commission issued a rule banning new non-compete agreements with all workers. However, a court in Texas issued an injunction striking down the regulation. The FTC has appealed the decision.