What are the Laws Regarding Payback from Employees?

Employers who advance money to employees either through a special request or an Employee Payback Agreement (EPA) become a type of banker for their employees. This can place strain on the employment relationship as well as create accounting nightmares and liability problems. Federal law does not require employers to provide payroll advances to employees, and most employers do not allow employees to have such loans.

What are the Laws Regarding Payback from Employees?

Laws differ in how much an employee can borrow and how the money is repaid. The most common payback method is through the employee’s paycheck, deducting the advance. While some states might not have additional protections to the federal law, others will so always check your state law.

Federal Law on Payback from Employees

Federal law allows employers to deduct the employee’s advance from their upcoming paychecks. However, the federal law blocks employers from deducting so much from the employee’s pay that the hourly wage drops below minimum. Therefore, employers may need to extend the repayment across several paychecks.

Some State Law on Payback from Employees

State law tends to be more protective of employees. A few states don’t allow employers to deduct the advance from an employee’s paycheck unless the employee signs an agreement for the deductions. This is a good safeguard, regardless of whether or not the state requires it. Written proof will keep every transaction above reproach.

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How does the Employee Payback Agreement Work?

The employee payback agreement (EPA) is basically a contract. Usually it’s made between an employer, an employee, and a recruiter. Typically, an employer wants an employee to pay them back for quitting before reaching an agreed upon date, for an expensive training, or for their recruiting fee. An EPA is enforceable under the law.

Neil received a job offer through a recruiter and was told that if he accepted this job that he had to remain at the job until a year had passed so as not to awake the EPA. Basically, the EPA meant that the recruiter would be paid by Neil’s future employer for having found Neil. The job seemed ideal so Neil accepted. Two months in, Neil was already regretting his choice. The company was not all it cracked up to be, but if he left now, he’d be required to repay the recruiter’s fee due to the EPA. He was stuck.

Honestly, EPAs can be an absolute nightmare to untangle for employers, employees, and recruiters alike. If you find yourself dealing with an EPA, your best and likely most successful option is speaking to a lawyer before making any big decisions. Depending on the situation, you may have options, but an EPA is legally binding and you may have to deal with the outcome.

What Happens if I have an EPA and I Leave my Job Early?

When an employee quits the job with an EPA, their employer then demands that the employee pay back the fee that they paid the recruiter. Since the EPA is legally binding, the employer is within their rights to enforce it. For the recruiter, the EPA becomes an Applicant-Pay-Fee (APF) placement. Suddenly, the former employee is staring down a multi-thousand fee that they legally must pay back.

Lending Laws

The federal law considers the EPA situation in light of Regulation Z of the federal Consumer Credit Protection Act. When the client pays the recruiter for finding the employee and the employee quits early, by law the employee essentially ends up owing or paying off the fee that was paid to the recruiter. In this scenario, it’s the recruiter who has arranged the money exchange and therefore faces the legal repercussions.

This doesn’t even go into the state disclosure laws that require a written contract, including names, addresses, and amount of money paid. State licensing laws are a whole other animal as well. And then, there are the civil laws that can bite the recruiter, employee, and employer in the butt.

File a Lawsuit for Payback of Money

When an employee leaves before the EPA has expired, the employer tries to regain the money it lost on the recruitment cost of that employee. Very likely, that employer will file a lawsuit against the employee for breach of contract while the employee will file a claim against the recruiter for fraud or conspiracy. Things are about to get messy and very legal.

Although locked in a three-way battle, each of you seeks to recover damages done for this business transaction. The employer or employee may claim punitive or exemplary damages. In many cases, the courts side with the employer or employee, but rarely with the recruiter who arranged the EPA.

If you are an employee locked into a position due to an EPA but want to quit, contact an employment attorney now to hear your legal options.

Chat with an employment attorney: (412) 626-5626 or lawyer@lawkm.com.