They recruited IT staffers with the promise of a prestigious career. But there’s a catch — workers had to stay for two years or pay nearly $24,000

The lawsuit, filed on behalf of a former Smoothstack employee that seeks class-action status, is the latest to highlight the practice of employers binding workers to companies through training repayment agreements. These provisions in employment contracts require workers to pay their employers if they leave their job before working for a minimum amount of time set by the company. 

Over the past several months, regulators have upped their scrutiny on these deals, which cover employees in industries representing about one-third of all workers in the U.S. By threatening to saddle employees with debt if they quit, these agreements have stoked the ire of both consumer and labor advocates, who say they’re employers’ latest tool in the fight to maintain power over workers. 

The contracts can violate labor laws in a number of ways, including by pushing the cost of training that principally benefits the employer onto a worker, advocates and attorneys have alleged. They’ve also argued in some cases that these provisions violate consumer protection laws surrounding the information lenders are required to disclose to borrowers about credit they offer. 

The Smoothstack lawsuit, “shows that employers are becoming more and more aggressive and creative in their design of contracts to keep workers trapped in their jobs,” said Jonathan Harris, an associate professor at Loyola Law School, Los Angeles.   

The dynamics highlighted in the case also offer a window into the next iteration of companies using the promise of “fancy training and a big career,” to lure desperate job seekers into taking a risk that they will wind up with a “huge unaffordable debt,” said Persis Yu, deputy executive director and managing counsel at the Student Borrower Protection Center, an advocacy group whose attorneys are representing the plaintiff in the suit. 

The tactics of collapsed for-profit college chains provide the most aggressive examples of this approach, but the idea that more schooling or training will help a job seeker land a better gig and improve their earnings, is “at its core what the promise of student loans is,” she said.  

The Smoothstack lawsuit illustrates another way that “debt is creeping in and really undermining the goal of education and training as a form of social mobility,” she said. 

Smoothstack did not respond to a request for comment. 

Looking for a job at the height of the pandemic

When Justin O’Brien, the named plaintiff in the case, was looking for work during the height of the pandemic in the spring of 2020, he came across advertising from Smoothstack, pitching that he could get paid to do programming assignments starting at $55,000 a year, according to the complaint. After a year of working for a call center for low-pay and amid a health and economic crisis, where he was concerned about his ability to land decent-paying work, O’Brien decided to apply for a job with the company. 

O’Brien began training with Smoothstack and worked up to 80 hours a week, the 43-page complaint alleges. For three weeks he wasn’t paid for his work, then at the end of that period Smoothstack asked O’Brien to sign a contract promising to pay the company $23,895 if he worked for the firm for less than two years. O’Brien signed the contract because he “desperately needed the job,” according to the complaint, and because at that point he’d already worked for Smoothstack for nearly three weeks without pay. 

O’Brien continued on in Smoothstack’s training program for the next several months. According to the complaint, participants in the training program would tackle assignments that usually involved writing code for different software programs. The skills and time required to complete the assignments escalated as the training program progressed. Participants were often given quick deadlines — sometimes as fast as 24 hours or over the weekend — to complete assignments, the suit alleges.

During the training program, Smoothstack only paid recruits for up to 40 hours of work per week, even though they frequently worked longer hours, according to the complaint. During this period, recruits were paid the minimum wage where they lived for this work. 

After about five months working in this setting, Smoothstack deployed O’Brien at Accenture
ACN,
-1.03%,
the IT and consulting giant. At that point, he was presented with a new agreement that required him to pay Smoothstack $23,895 if he left the company before billing 4,000 hours — the equivalent of two years — to a Smoothstack client. Even once O’Brien was deployed to a client he remained a Smoothstack employee. 

O’Brien “identified immediately that he had to sign – or else he would be in violation of the Training Agreement,” that he’d signed after the three-week unpaid training period, according to the complaint. “This is because the TRAP in the Training Agreement bound Plaintiff to a Service Commitment Period of 4,000 hours of work for a Smoothstack client, which was not possible to perform until after he completed the Training Program.” 

For more than two years, O’Brien worked for Accenture through his agreement with Smoothstack. For much of that time he was paid $20 an hour less than the prevailing market rate for computer programmers, the suit alleges. He received positive reviews from those overseeing his work at the company. Accenture did not immediately respond to a request for comment. 

About two and a half years after O’Brien was deployed to Accenture by Smoothstack, he sent correspondence to Smoothstack through his lawyer to try to convince the company to settle the class-wide claims of wage and hour violations he ultimately alleged through the suit, according to the complaint. Over the next few months, O’Brien through his attorney tried to get a response from Smoothstack to his claims, the lawsuit alleges. 

Then in March of this year, the company moved O’Brien from Accenture to “bench status,” a situation where was still an employee of Smoothstack but wasn’t deployed to any of the company’s clients. During this period he earned minimum wage and couldn’t rack up the billable hours needed to escape his training repayment agreement provision, according to the complaint. O’Brien ultimately filed the suit on April 4 of this year and was terminated by Smoothstack on April 7. 

Employers increasingly asking workers to pay for training they don’t benefit from

O’Brien alleges that the training repayment agreement violates certain labor laws, including those regulating the minimum wage. In earlier cases decades ago, courts declined to find that training repayment agreements violated minimum wage law, where the training benefited the employee, said David Seligman, the executive director at Towards Justice, a nonprofit law firm that is representing the workers in the suit. 

Historically the training employers typically required workers to repay provided training or education furnished by the employer that employee could carry with them if they left the company. For example, sponsoring a worker’s MBA. 

But increasingly companies are asking workers to pay for training that is principally for the employer’s benefit, Seligman said. When that’s the case, the agreements violate various labor laws, he said. “It’s the cost of employing someone,” Seligman said of training that primarily benefits the employer. “Those costs can’t be shifted onto workers, when they are shifted onto workers then it’s a deduction and a kickback of their wages.” 

In some cases, even if the training provides a benefit that the employee can take with them, training debt may still violate consumer protection and other laws, Seligman added. And yet, the Smoothstack suit highlights how pervasive these contract provisions are, he said. 

“It’s not just nursing, it’s not just PetSmart,” he said, referring to a high-profile lawsuit filed by Towards Justice and with support from SBPC about a training repayment agreement used by the pet retailer. “We’re talking about software developers, we’re talking about engineers, we’re talking about large segments of the economy. We’re talking about major Fortune 500 companies who are depending on these workers in order to meet their labor demands.” 

Though in many cases these agreements don’t hold up in court — a Virginia state court already held that Smoothstack’s TRAP is unenforceable, according to the complaint — they can still have “a chilling effect,” Seligman said. 

“Including them is a powerful threat against workers,” he said. “The consequences in many cases for doing that are far too weak.” 

The use of these agreements has ticked up in recent years for a few reasons, according to Harris, the law professor, who is also a fellow at the Student Borrower Protection Center. For one, the tight labor market and worker shortages in certain sectors has pushed companies to find ways to keep their workers. They’re also part of a broader decline in worker power and unionization that’s taken place over the past few decades. 

In addition, as state and federal regulators scrutinize non-compete agreements, or clauses that prevent employees from working for a competitor after they leave a job for a period of time, employers are looking for other ways to make it difficult for workers to leave.  

“This Smoothstack scheme is one of several quite bold contracts that I’ve seen employers come up with just in the past year as workarounds potentially to government restrictions on other kinds of restrictive contracts,” Harris said. “They’re coming up with novel schemes to have the same effect of keeping workers in their jobs through punitive contracts, but that would survive scrutiny by government agencies and courts.” 

The Federal Trade Commission proposed a rule earlier this year that would ban noncompete agreements. The agency’s proposed regulation includes a provision limiting the use of training repayment agreements, calling them out as “a de facto non compete agreement because it has the same effect of keeping workers from leaving their jobs,” Harris said. 

“The bad news is that it includes a caveat that only covers TRAPs where the repayment amount is not reasonably related to the amount the employer spent on training,” Harris said. “That is a major loophole that employers will exploit if it’s not closed.” 

Last year, the Consumer Financial Protection Bureau also launched an inquiry into employer-driven debt. The Student Borrower Protection Center has encouraged the agency to scrutinize training repayment provisions and enforce consumer protection laws surrounding credit products when they apply. The CFPB should also routinely monitor debt collectors hired by employers to recoup the money owed by former employees under these agreements, the SBPC said. 

“It’s a predatory student loan for a for-profit school that overstates its success rate,” Seligman said. “That kind of story that we’re all too familiar with. The different variation is the debt is used to rob workers of their bargaining power to keep workers trapped in their jobs.”