The federal government has put employer-arranged debt in its crosshairs, so if your organization makes its employees or job applicants or independent contractors use this kind of debt for training or supplies, expect scrutiny in the months ahead.

The type of debt arrangements the Consumer Financial Protection Bureau (CFPB) is looking at is likely concentrated in businesses that use independent contractors but it’s not limited to them. 

The concern is that companies are requiring people to use employer-arranged debt to obtain supplies or equipment or training as a condition of employment or getting work assigned to them, and then having this debt hanging over them if they leave.

“Employer-driven debt, like other debt, could pose risks,” the CFPB says in a request for information. “Consumers may not understand whether these arrangements involve an extension of credit, whether they have the ability to comparison shop for credit offered by others, or whether entering into the debt agreement is a condition of employment.”

Market distortion

CFPB Director Rohit Chopra says he’s concerned the use of this kind of debt could distort labor markets to the extent it forces people to stay with an organization when they’d rather go elsewhere. 

“The labor market operates at its best when workers are able to move freely within it,” he said. “Our inquiry is about studying the effects of an emerging form of debt that may have the potential to trap employees in place.”

Burden on workers

The arrangements can take a number of forms, but in general they require people to make up-front purchases of equipment or material, or to pay for training, and if they can’t pay for it out of their own pocket to use employer-arranged debt. If the job doesn’t work out, they’re still on the hook for the debt payments. 

“A company may provide training to a new hire, and require that the training’s cost be paid back if the employee leaves or is fired within a set period,” the agency says. 

By asking people for information on these arrangements, the agency says, it’s hoping to learn how well organizations are explaining how the debt works and how well people understand what they’re getting into. 

“Workers may not understand that these arrangements involve an extension of credit,” the agency says. 

Whether people understand these debt requirements could pressure them to stay at a job just to meet the payback requirement is another line of questioning the agency is pursuing.

“This includes [whether people understand] the status of the debt may impact a decision to seek alternative employment,” the agency says. “These potential risks might limit competition in the labor market and in the market for similar consumer financial products and services.”

If you’re counsel at an organization that has this type of program in place or otherwise have an interest in this, the CFPB is seeking your input until September 7.