Ninth Circuit Holds that Repayment for Training is Not an Illegal 'Kick-Back'

Many employers provide expensive training to new employees only to see the newly trained employees disappear after a short tenure.  In order to recoup the costs associated with upfront training, some employers require repayment of training costs on a graduated scale based on the tenure of employment.  In Gordon v. City of Oakland, the Ninth Circuit Court of Appeals determined that such a written agreement did not violate the Fair Labor Standards Act as an unlawful kick-back.

In Gordon the City of Oakland’s police department required officers to repay a portion of their training costs if they voluntarily left the City’s employment before completing five years of service.  If they left prior to one year of employment, the departing officer owed 100 percent of the training costs and the percentage dropped by 20 percent every year until no repayment was required for a separation after five years of employment.  The written training reimbursement agreement was signed by employee Gordon.  Gordon resigned after completing her second year of service and received her full paycheck.  However, the City withheld her accrued unused vacation and compensatory time off as partial payment for the training costs and also served her with a demand for the remaining training costs which were not covered by the withheld amounts.   

Gordon filed a lawsuit alleging that the City’s action violated the federal Fair Labor Standards Act.  Specifically, Gordon alleged that there was no legal difference between deducting the entire sum from her paycheck and directly demanding payment of the sum after receiving her paycheck.  Both resulted in a negative sum for her last week of work and therefore violated the minimum wage requirement of the FLSA.

The district court disagreed and held that the issuance of a paycheck exceeding the minimum wage amount complied with the FLSA and that the subsequent demand was, indeed, a distinction with a difference.  On appeal to the Ninth Circuit, the Court agreed and held that the City was free to both deduct a portion of the training costs and seek repayment of the remaining training costs as “an ordinary creditor” and that the agreement to repay the training costs did not constitute a kick-back under the FLSA.

Employers who choose to rely on such a repayment plan should note the following.  First, the employee signed a written agreement which provided the basis for recoupment of the training costs.  Second, and most importantly, the employer made sure that the employee’s last paycheck met the minimum wage requirements and did not subtract the entire amount due.  The Court suggested that its holding may have been different had the paycheck fallen below the minimum wage requirements.  Employers are cautioned to ensure that any and all deduction from wages are expressly agreed to ahead of time by the employee since both state and federal law require this.  In addition, if an employer contemplates satisfying such “loans” from final paychecks, this also needs to be specifically set forth in the agreement.  The wiser alternative is to make sure that the final paycheck at least results in payment of minimum wages for the final week accompanied by a demand for payment of the remaining amounts.