(Bloomberg Markets) -- BreAnn Scally is a pet lover, the kind who wishes she could take home every stray she passes on the street. So she was intrigued last year when she discovered that PetSmart, the pet-supply chain, offered what it advertises on its website as “FREE paid” grooming training. She hopes to open her own cage-free animal shelter one day, and she figured she should get comfortable with a pair of clippers. That way, she wouldn’t have to pay someone when she brought home an errant pooch in need of styling. “I could just do it myself,” she says.
Scally, who was then 23, soon discovered PetSmart’s training wasn’t exactly free. Not long after she was hired in February 2021, she started in what PetSmart refers to as its grooming academy, at a store in Salinas, Calif. But first she had to sign a contract. It said that if she left less than a year after she started the program, she’d have to reimburse the company $5,000 for training costs and $500 for grooming tools. The penalty was reduced by half if she didn’t complete the second year. It seemed like a lot to someone making $15 an hour.
If only she hadn’t been disappointed by what followed. PetSmart, which declined to discuss Scally’s experience as an employee, says the academy includes three weeks of hands-on training from an instructor; workers must then trim 200 canines and spend six months as “stylists in training” before they can become full-fledged groomers. Scally, however, says she was rushed through, getting only two weeks of one-on-one training from her salon manager, who was often busy barbering pets for customers. By her account, she mostly learned to coif dogs on the job. She says that the store was understaffed and that she and her fellow groomers were often overwhelmed as they tried to assuage difficult customers, to say nothing of their sometimes ornery pets. “To be 100% honest, I hated it there,” Scally says. “It made me very depressed.”
So did the thought of having to pay $5,500 if she departed too soon. Regardless of the language of her contract, Scally says her managers told her that if she brought in enough money trimming dogs and persuading customers to buy more expensive shampoo and nail treatments for their pets, PetSmart wouldn’t pursue her for the training costs. She thought she was in the clear when she resigned last September after seven months at the company. But when she checked her credit report in January, she found that a collection agency in St. Paul, Minn., had come after her for the full $5,500 on PetSmart’s behalf. She was already dealing with student loans and credit card debt. And now this?
Such agreements were once unheard of, because companies believed it was their responsibility to pay for training. Jonathan Harris, an associate law professor at Loyola Marymount University in Los Angeles, has studied these clawback deals and says they emerged in the 1990s in high-paying fields like finance, where employees could be saddled with as much as $75,000 for a premature departure. They’ve since spread to more modest professions such as nursing and trucking. “In the last 5 to 10 years, they’ve really taken off,” Harris says. In 2020 the Cornell National Social Survey found that almost 1 in 10 American workers had signed one.
Attorneys who advise companies on how to use them say they’ve become almost indispensable in the Great Resignation. “I’m seeing employers enter into these agreements, saying, ‘I’m not about to put out of pocket the amount of money that it takes to get this person sufficiently trained in order for them to just go take that over to a competitor,’” says Angie Davis, chair of the labor and employment group at the law firm Baker Donelson in Memphis. “This is just a way for companies to protect themselves.”
PetSmart LLC, owned by BC Partners LLP, a British private equity firm, offers much the same defense of its clawback arrangements. The company, which is based in Phoenix and has about 1,660 stores in the US and Canada, says that grooming training can cost as much as $10,000 elsewhere, and this is the only way it can offer its academy “free of charge.” (According to Pet Groomer.com Magazine, instruction can range from several thousand dollars to $13,000.) PetSmart says less than 2.1% of the more than 11,000 employees who’ve completed the program have departed before the end of their two-year contract. “We hope to keep them beyond their two years, but they’re learning a trade they could take with them potentially anywhere,” says Jenna Wait, quality and education leader for PetSmart in California.
But consumer advocacy groups say the contracts are often used to shackle workers to their job. Connecticut has banned what it refers to as “employment promissory notes” since the 1980s, unless they’re part of a collective bargaining agreement. In 2020, California forbade hospitals from making nurses sign them.
These deals have also been the subject of dozens of lawsuits alleging the costs involved don’t begin to approach the mandatory payback amounts—and, in one prominent case, a federal judge sympathized, even as courts have generally upheld the contracts.
In July, Scally became the latest worker to mount a legal challenge, filing suit against PetSmart in a San Mateo, Calif., superior court. In the complaint, her lawyers argue that, under California law, PetSmart can’t charge workers for training that’s primarily job-related. If the skills are easily transferable, Scally’s suit also claims, PetSmart is operating an unlicensed school and shouldn’t be pursuing former students for their debts. PetSmart declined to comment on the suit.
In an April letter, US Senate Banking Committee Chairman Sherrod Brown and other Democratic leaders told the Consumer Financial Protection Bureau that such contracts “turn workers into debtors and employers into creditors.” Two months later, the CFPB announced it was launching a broad inquiry into the practice.
The debate over clawback contracts is taking place as part of a wider struggle between workers and employers in the US economy. Employers spent $92 billion on training last year—roughly the same as in 2017, according to Training magazine. Meanwhile, they’re increasingly demanding that new hires have expensive credentials. Nicole Smith, chief economist for the Georgetown University Center on Education and the Workforce, says workers with a postsecondary education held nearly two-thirds of US jobs in 2020, compared with about a quarter in 1973. “When you’re requesting more and more degrees and certifications, then individuals are bearing the cost of training, not necessarily the firm,” she says.
With US student debt hovering above $1.7 trillion, training repayment agreements are only adding to what their skeptics say is an unconscionable burden on American workers. Now, as companies seek to recoup these expenses, some workers are saying “enough.”
After five years in the US Navy, Ramin Shirvani set out to find a tech job on Wall Street in 2012. The son of immigrants—his father is from Iran, his mother from Mexico—he was already armed with an MBA. Shirvani had also taken computer science classes at West Virginia University and later received a degree in software project management from an online school. But nobody wanted to hire him. “Everyone always says veterans this and veterans that, but it’s really hard as a veteran to get a position,” says Shirvani, who was 31 at the time.
What happened next became the subject of a lawsuit often cited by critics of training repayment agreements. Shirvani responded to an online advertisement placed by FDM Group Holdings Plc, a publicly traded UK-based outsourcing company. It offered what it described in documents later filed in court as “free” training to employees, with the promise that it would place them in tech consulting positions at clients such as Citigroup, UBS, JPMorgan Chase, and Bank of America.
Shirvani says he found the training classes useless; the lessons mainly had to do with coding, which he’d already learned in college. The company did place him in a consulting post at Citigroup. But he says he had to sign a contract, agreeing to reimburse FDM for $30,000 in “charges” related to his training if he left before one year, according to a court filing. The amount declined by $20,000 if he departed before the end of his second.
FDM also warned in its employment agreement that it would charge workers as much as 18% in yearly interest on any portion of the fee they didn’t repay on their last day of employment while the contract was in effect. In court documents, FDM later defended the agreement, saying it was necessary to “prevent employees from exploiting their valuable training, denying FDM its bargained-for return on investment and damaging its reputation with clients.” (FDM declined to discuss the details of Shirvani’s case, saying, “the company has moved on.”) Despite his misgivings, Shirvani went ahead and signed. “I didn’t have a Plan B,” he says.
Soon he regretted the decision. In court papers, Shirvani said FDM paid him a starting salary of $23,000 and a daily bonus of $88 if he worked eight hours. That didn’t go far in high-priced New York. He says he found a cheap room in Brooklyn on Airbnb. The owner slept in the kitchen. Shirvani and another boarder got the two small bedrooms. He says he suffered from malnutrition in his first year at Citigroup. “I was going through hell,” he says. “I could only afford microwaveable meals.”
Meanwhile, because he was in a managerial role and reviewed budgets, Shirvani says he discovered Citigroup was paying FDM $120,000 a year for his services, meaning his employer was pocketing the difference. (Citigroup says it doesn’t typically know contractors’ compensation but expects them to be paid fairly and competitively.) He was furious, but he was already weighed down with college loans. If he exited, he’d be further in debt.
As soon as his time was up, in 2015, Shirvani departed for higher-paying jobs at investment banks including Morgan Stanley and UBS. Even so, he was happy to tell his story when he learned of another ex-consultant who’d filed a class-action complaint in New York against FDM. It alleged, among other things, that the clawbacks amounted to “an unlawful kickback” to the company under the Fair Labor Standards Act. In a court filing, FDM denied this, saying it had acted in good faith.
In 2017, US District Judge Laura Taylor Swain rejected the kickback claim and said she found nothing unusual about the penalties. However, the company, while denying wrongdoing, later settled an allegation that it had withheld overtime payments. Shirvani’s share of the $4 million payout was a negligible $1,500. He’s just grateful the suit exposed what he considers FDM’s rough treatment of its employees. “It’s not acceptable,” he says.
Wayne Bland grew up in Brooklyn and comes from a family of civil servants. After more than a decade in the financial industry, including a stint at mutual fund company Vanguard Group, he was running his own one-man operation in Charlotte. It was then, in 2014, that he was recruited by Edward D. Jones & Co., one of the largest securities brokers in the US. “They said, ‘Hey, listen, you can run your business the way you want,’” Bland recalls. “‘We’ll give you all the marketing support. We’ll even take care of your office.’”
However, according to documents filed in another frequently cited case, Bland had to sign an agreement that he’d reimburse the company for the cost of training, along with “selection and hiring” expenses, if he left before three years after its completion and went to work for a competitor. The total sum in the contract was $75,000. (That was for the first year. It would then be reduced on a quarterly basis for the rest of the term.)
During the first eight weeks of instruction, Bland studied for tests he needed to ace to sell securities and insurance. Such preparation would have cost him very little elsewhere. Test prep provider Kaplan Inc. offers study packages on its website for as little as $259.
The second portion of his training began with five days of instruction on door-knocking before he was turned loose for seven weeks of house-to-house canvassing in a low-income suburb of Charlotte. He was to collect the addresses and phone numbers of people who were willing to be contacted in the future by the company, with a quota of 25 per day. Bland says that he found this method “antiquated,” and that if it had been up to him, he would’ve recruited customers by holding investment seminars, as he’d done in the past. (Edward Jones declined to discuss Bland’s time at the company.)
Once he’d finished the training, Bland says, he spent his first five months working from home, and not by choice, which made it difficult for him to sign up clients. When he finally did get an office in the company’s Lake Wylie, S.C., branch, it was a room that had been used as a supply closet and was still filled with boxes. Not that he got much support from the senior adviser at the branch, who was supposed to be his mentor, he says. It wasn’t long before his superior retired.
Normally, Bland says, Edward Jones would have turned the senior adviser’s accounts over to him. After all, he was the only remaining adviser at the Lake Wylie location. Bland, who is Black, says instead the firm gave them to a recently hired White adviser who arrived shortly after and took over the branch. “That was the icing on the cake,” he says.
In 2016, Bland quit. Not long after he started working for a small investment firm, he received a letter from Edward Jones demanding $75,000 for training expenses. In 2018, Bland and three other ex-Edward Jones advisers in similar positions sued the company in US District Court in Chicago, challenging the legality of the practice. Like the attorneys in Shirvani’s case, they argued that the clawbacks violated the federal kickback ban. And much like Shirvani’s employer, Edward Jones responded in a motion to dismiss the case that the penalty was necessary to safeguard its training investment and to prevent recently hired advisers from taking their skills to rival brokerages.
In 2019, Judge Robert Dow Jr. wrote that he was “somewhat skeptical that the actual costs of training totaled $75,000.” Still, he dismissed the claims involving the training contracts. Ultimately, Bland was able to avoid paying the penalty, but in a rather roundabout way. He and two more Black former advisers for the company had filed a federal class-action suit accusing Edward Jones of racial discrimination. Last year the two sides announced a settlement in which the company denied any wrongdoing but agreed to pay $34 million to current and former Black advisers. In a statement, Edward Jones says it “takes its commitment to diversity, equity, and inclusion seriously” and seeks “to make a positive impact in the lives of its clients, colleagues, and communities.”
Edward Jones also promised not to claw back training costs from former employees who’d departed before that year. Bland says he’s received calls from grateful ex-advisers, some of whom abandoned their careers in the industry because they feared the firm would come after them for unpaid training expenses. “The other advisers were like, ‘Man, this was a nightmare,’ ” says Bland, who now owns a trucking company in Charlotte. Edward Jones still requires new hires to sign repayment contracts. However, as part of the settlement, the firm did make a concession: It lowered the total clawback amount to $50,000.
These days, Scally, the dog groomer, lives in Belmont, Calif., with Mellow, her 1½-year-old German shepherd. She didn’t go looking for a lawyer to take on PetSmart. Last year, when she was still working there, she was contacted on LinkedIn by an investigator for Towards Justice, a Denver law firm that represents workers. It began looking closely at PetSmart after discovering the chain’s employees complaining about the clawback agreements on Reddit and Facebook. “PetSmart has one that affects these very low-income workers,” recalls Towards Justice’s Rachel Dempsey, the lead lawyer in Scally’s case.
Towards Justice was working with the Student Borrower Protection Center, a Washington-based nonprofit. Its executive director, Mike Pierce, a former CFPB official, is fully aware of legal cases like Shirvani’s and Bland’s that relied on federal labor law with mixed results. Pierce makes the case, however, that clawbacks violate consumer-protection laws, particularly those forbidding unfair lending and debt collection practices, and he’s been eager to find the right case to test his theories. “You have this other body of rights and protections,” he says. “And they’re stronger in many ways.”
At the time, Scally thought she could handle her problems with PetSmart on her own. Still, she kept the law firm’s number. She says she didn’t feel right about what she was going through at PetSmart. It wasn’t just that she felt overworked, she says; it was tough for her to pay bills and take care of her pets on $15 an hour.
She was also trying to whittle down her debt on multiple credit cards and from college loans. Raised by her mother, a mental health counselor, Scally had gone to California State University at Chico on a partial track scholarship. Then the pandemic started, and her classes moved online. She never got her degree.
Until she gets herself out of the red, Scally says, it will be tough to open what she refers to as her “sanctuary,” a place where animals she’s rescued will be able to roam about in the backyard and even indoors. She’s hoping to move in with her boyfriend next year so she’ll have enough room.
That’s why she phoned Dempsey in January after discovering that PetSmart had hired a debt collector to dun her for $5,500. “I just don’t want to be stressed with more and more debt,” she says.
That hasn’t stopped Scally from laying the groundwork for her sanctuary, Furry Farms Animal Rescue. She’s created Facebook and Instagram pages. “I’m just doing whatever steps I can,” she says. “I have roommates. So right now, I’m not going to just go out and start bringing home dogs.”
Leonard is a senior writer for Bloomberg in New York.
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