Employer’s Attempt At Repayment Of Training Costs Can Backfire Causing Employee Misclassification Under the FLSA


By Andrew J. Henson and Michael A. Kornbluth

henson-andrewA growing practice among employers is to require new hires to sign a Training Cost Agreement (TCA), which puts employees on the hook for the cost of their on-the-job training if they quit or are fired before completing a period of years of work for the employer. The concept is something like the evil twin of the signing bonus. However, a recent court ruling in the Middle District of North Carolina suggests enforcing these agreements may backfire and cause an employee who was previously exempt from overtime laws under the Fair Labor Standards Act to suddenly become subject to overtime laws, leaving the employer liable for back pay for any hours of unpaid overtime.

kornbluthmichaelUnder the FLSA, employees are entitled to “a fair day’s pay for a fair day’s work.” This includes overtime for nonexempt employees who work more than forty hours in a week. Exempt employees are not entitled to overtime. The determination of who is exempt and who is not can be complicated, and has been subject to fierce dispute in the courts. Typically employees classified as exempt are those whose job duties can be considered administrative, executive, or professional. But, these white collar workers may still qualify as nonexempt employees, if the way they are paid does not satisfy what’s called the “Salary Basis Test.”

Under the “Salary Basis Test”, employees must be paid on a salary basis equal to a minimum of $455 per week in wages (this amount is set to increase to $913 on December 1, 2016). Further, employee pay must be distributed “on a weekly, or less frequent basis,” and pay must be “a predetermined amount . . . not subject to reduction because of variations in the quality or quantity of the work performed.” 29 § C.F.R. 541.602(a).

However, various means by which employers have attempted to collect money from employees have backfired and caused the respective employee’s employment to fail the Salary Basis Test. An employer having “an actual practice of making improper deductions demonstrates that the employer did not intend to pay employees on a salary basis.” 29 § C.F.R. 541.603(a). Examples of “improper deductions” include reduction of pay for salaried workers when they fail to work a specified number of hours in a certain week (See, Smith v. Central Security Bureau, Inc., 231 F.Supp.2d 455, 463-65 (W.D. Va. 2002)), requiring managers to personally reimburse their employer for cash shortages and other losses occurring under their supervision (See Hoffman v. Sbarro, Inc., 982 F.Supp. 249, 251 (S.D.N.Y. 1997)), and suspending exempt employees without pay (See Takacs v. Hahn Auto. Corp., 246 F.3d 776, 780-81 (6th Cir. 2001)).

In Ketner v. Branch Banking & Trust Co., the Middle District of North Carolina recently held that an employer’s attempt to enforce a Training Cost Agreement may be counted as an “improper deduction” in salary. Ketner v. Branch Banking & Trust Co., 143 F.Supp.3d 370 (M.D.N.C. 2015) (“This Court concludes Plaintiffs have stated a plausible claim that BB&T misclassified them as exempt based on alleged violations of FLSA’s salary-basis test.”).

If an employee has left her job and the employer has demanded she repay money for training, attempts to collect on a “Training Cost Agreement,” or has made arbitrary reductions in the amount of pay she receives, that employee may be assimilated to the status of a non-exempt employee and owed overtime under the FLSA.