In an attempt to disincentivise resignation, many employers in the United States have resorted to extreme measures to curb the effects of the Great Resignation. One such measure is incorporating a "stay-or-pay" clause in employment contracts.
These clauses, also commonly referred to as "training-repayment-agreement-provisions" ("TRAPs"), typically require employees to pay back to their employer, the cost incurred in the recruitment and training of that employee should they resign from their employment within a certain period of time.
Although these clauses were historically prevalent in high-earning roles and/or specialised industries, such as the aviation industry where pilots required substantial up-front training, TRAPs have now found their way into more mainstream/less specialised jobs. According to the statistics, approximately 33% of US employees currently work in industries where the use of TRAPs is extremely common. The New York Times Magazine recently highlighted employees' resistance to TRAPs in an article wherein it considered the various arguments presented by employees and workers' rights advocates. One such argument is that TRAPs do not accurately reflect the costs incurred by employers but instead appear to be "inflated financial penalties" designed to discourage quitting.
Although TRAPs are currently permissible and effective, their lifecycle may be coming to an end. The Federal Trade Commission in the US has proposed banning TRAPs on the basis that, amongst other things, they contravene wage deduction provisions that expressly prohibit employers from requiring any repayment that would reduce their employee's wage rate below the applicable minimum wage.
Understandably, many employers may want to implement any and all measures to guard against the ripple effects of the Great Resignation, which has plagued many countries around the world. This is also the age of the Gen Z, dubbed as "Generation Quit", who are known to bounce from job to job.
Should any South African employers find the "stay or pay" concept attractive, the question arises whether it would be lawful under South African law. Of primary concern would be whether TRAPs would (i) be considered as penalties under the Conventional Penalties Act, 1962 ("CPA") and/or (ii) fall foul of the deduction provisions in the Basic Conditions of Employment Act, 1997 ("BCEA"), should the employer seek to recover the debt through a deduction from the employee's final salary.
At face value, the lawfulness of repayment clauses is supported by section 1(2) of the CPA, which stipulates that any sum of money for the payment of which a person may so become liable shall, by implication of the CPA, be regarded as a penalty. This is coupled with the provision in terms of section 1(1) of the CPA which states that a penalty stipulation provides that any person shall, in respect of an act or omission in conflict with a contractual obligation, be liable to pay a sum of money, by way of a penalty, shall, subject to the provisions of the CPA, be capable of being enforced in any competent court. This means that the sum agreed to in terms of a repayment clause would be regarded as a penalty in terms of the CPA and would be capable of enforcement. There is, however, a caveat to this. Section 3 of the CPA stipulates that, if upon the hearing of a claim for a penalty, it appears to the court that such penalty is out of proportion to the prejudice suffered by the creditor because of the act or omission in respect of which the penalty was stipulated, the court may reduce the penalty to such extent as it may consider equitable in the circumstances. Practically, this means that if a TRAP does not accurately reflect the costs that the employer incurred, the court is likely to reduce the sum payable to the employer to align with the actual loss suffered.
In addition, and similarly to the position in the US, section 34(2)(d) of the BCEA provides that the total deductions from an employee's remuneration must not exceed one-quarter of the employee's remuneration in money. This means that an employer would be limited in its ability to recover any debt through salary deductions from any final remuneration payments owing to the departing employee. It is also important to mention that section 34(2)(c) of the BCEA further states that the total amount of the debt deducted should not exceed the actual amount of the loss or damage.
The key takeaway from this is that whilst employers can use TRAPs in South Africa, they should be careful to align the penalty with the actual loss or damage suffered, ie the cost of recruitment, training courses and the like, as opposed to imposing inflated penalties, which may not be enforceable. Whilst using the proverbial big stick to disincentivise employees from job hopping may be effective, employers may want to also look at what "carrots" are available. In the age of the millennials and Gen Zs, employers need to adapt how they manage their workforce, ensuring that it caters for the generational idiosyncrasies, where possible, to try to retain their young talent. Aspects such as implementing flexible working arrangements, instilling a sense of purpose and involving employees of all levels in innovation and decision-making processes remain key considerations for whether Gen Zs stay or go...
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