In furtherance of recent trends to provide more flexibility for employees, New York has passed a new law that prohibits enforcing certain monetary penalties on employees who leave employment before the passage of a stated period of time. While the law leaves open some ambiguities, some of which were addressed in subsequent pending legislation, it is expected that the Trapped At Work Act (to be codified as Article 37, N.Y. Lab. Law §§ 1050–55) will directly affect many provisions commonly found in healthcare employment agreements. The Act as currently written is effective as of December 19, 2025. However, as of January 6, 2026, pending amendments were proposed (A.9452/S.8822) to refine the new law. If passed by the Governor, the amendments would have the effect of, among other new changes, extending the effective date for one more year until December 19, 2026.
Generally, the Act prohibits the execution, as a condition of employment, of an agreement between an employer and an employee (or prospective employee) that requires the worker to pay the employer (or a party related to the employer) a sum of money if the worker leaves employment before the passage of a stated period of time. An “employer” under the proposed amendments to the Act includes any individual or entity that employs an individual in any industry, and an “employee” under the amendments means any person employed for hire. An employer may not require, as a condition of employment, that an employee sign an “employment promissory note,” which means, under the amendments, any agreement (or contract provision within any instrument) that requires the employee to pay a sum of money if the employment relationship terminates before the passage of a stated period of time.
Importantly, the first version of the Act included independent contractors under the types of workers who would be affected by this law. The pending amendments, with their more narrow definitions and specificity about employees, would significantly limit the parties subject to the law’s restrictions. Additionally, the initial definition of “employment promissory note” specifically prohibited agreements that require a repayment of training fees, while the new amendments clarify further the instances in which certain credentialing costs may fall outside the scope of the law.
There are five exceptions to agreements that would otherwise be prohibited, as set forth in the amendments. These exceptions are much more detailed than the current four exceptions in the Act. The following types of agreements would be permitted under the proposed new law:
- An agreement that requires the employee to reimburse the employer for the cost of tuition, fees, and educational materials for certain types of transferable credentials that relate to the employer’s industry but are not specific to the employer’s proprietary processes (subject to certain specific conditions surrounding the amounts of the repayment, the form of the agreement, and the termination of the employee);
- An agreement that requires the employee to pay for property that was voluntarily sold or leased from the employer;
- An agreement that requires the employee to repay bonuses, relocation stipends, or other benefits that are not tied to specific job performance (but not if the employee is terminated under certain conditions, such as without cause);
- An agreement that requires an employee in an educational setting to abide by terms and conditions of sabbatical leave; and
- An agreement that is entered into as part of a program agreed to by the employer and its employees’ collective bargaining representative.
While not expressly specified in the law, it is likely that the third exception will be deemed to permit many common types of “clawback” provisions that are ubiquitous to physician contracts (such as repayment of signing bonuses, moving bonuses, and unused expense reimbursement accounts) but, as a key limitation, only if the repayment will not be enforced by the employer in the event that the employee is terminated without cause. However, requirements to repay malpractice premiums for unused portions of the term, or requirements to pay for tail insurance, may fall outside of these exceptions. Other common clawbacks, such as payment of deficits of unearned draws in incentive compensation formulas and repayments of collections-based compensation due to audits, may not fit within any exception, but would fall outside the scope of the law if they are not related to the employee remaining employed for a specific period of time.
Governor Hochul had stated that the Act is not intended to prevent beneficial programs relating to voluntary tuition assistance, leading to the expanded detail and the creation of the “transferrable credential” concept. However, the issue of insurance coverage is not addressed. It remains to be seen whether agreements wherein the employer will pay graduate loans, waive tail insurance, or fund a retirement account only if the employee remains employed for a certain length of time would be affected by the same theory. It is also not yet clear whether the law applies retroactively to agreements that would be executed prior to December 19, 2026.
The penalties for violations of the Act include civil penalties between $1,000 to $5,000 for each violation, and recovery of employee’s attorney fees in connection with a successful enforcement. There is no private right of action for employees. The Department of Labor must keep certain factors in mind when analyzing a potential violation under the Act (including the size of the employer’s business, the good faith basis of the employer to believe that its conduct was in compliance with the law, the gravity of the violation, and the history of previous violations). If a portion of an agreement is found to be unenforceable under this law, the rest of the agreement will expressly remain unaffected.
This article discusses the proposed amendments to the currently effective law. If the amendments are not passed, certain information herein will be inapplicable, and the law will continue under a different structure. New York employers are advised to be vigilant about including any clawback provisions in employees’ contracts following December 19, 2025, even though the Act may be delayed until the end of 2026. Employers are encouraged to inquire whether a proposed provision might be excluded by the Act or may perhaps be effectuated through other mechanisms. Specifically, healthcare employers are reminded about federal and state referral and kickback laws and the related safe harbors that govern the design of incentive compensation structures, and about other labor law prohibitions on deductions of compensation that might be triggered by set-off provisions. For employees in New York, it is recommended that one look out for prohibited reimbursement policies and other requirements to make payments to an employer as a condition of employment if employment is terminated before a certain date, if such obligations are clearly not related to job performance, such as certain liquidated damages provisions relating to early termination. Additionally, all parties are encouraged to speak to an accountant or tax attorney regarding the tax effects of clawbacks that do take place.
The thoughts expressed in this article are not legal advice, but are intended to alert the reader to a legislative change that may affect an individual’s legal rights and obligations, depending on each individual’s circumstances.
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