California’s Assembly Bill 692, Restricting Many So-Called “Stay-or-Pay” Employment Contract Terms, Set to Take Effect January 1, 2026

On January 1, 2026, Assembly Bill (AB) 692 will take effect in California, amending the Labor Code and Business and Professions Code to prohibit certain “stay-or-pay” provisions in employment contracts.  Such provisions are commonplace; for example, many companies offer incentive or retention bonuses which can be clawed back if the worker leaves before a specified date.  Similar provisions are sometimes referred to as training repayment agreement provisions (TRAPs). These now-regulated clauses traditionally required workers to reimburse employers for costs associated with work-related training, education, relocation, or other expenses if they leave employment before a specified date.  These contractual provisions are the target of the new California law.

AB 692, which will be added as Section 16608 to the Business and Professions Code and Section 926 to the Labor Code, prohibits employers from including “in any employment contract, or to require a worker to execute as a condition of employment or a work relationship a contract” that does any of the following:

• “Requires the worker to pay an employer, training provider, or debt collector for a debt if the worker’s employment or work relationship with a specific employer terminates.”
• “Authorizes the employer, training provider, or debt collector to resume or initiate collection or end forbearance on a debt if the worker’s employment or work relationship with a specific employer terminates.”
• “Imposes any penalty, fee, or cost on a worker if the worker’s employment or work relationship with a specific employer terminates.”

The new law creates a private right of action, allowing affected workers or “worker representatives” to bring claims on behalf of “that worker, other persons similarly situated, or both.” Minimum damages of $5,000 are available per affected worker, in addition to injunctive relief and recovery of attorneys’ fees and costs.

AB 692 is not retroactive and applies only to contracts entered into on or after January 1, 2026.

Key Exceptions

While AB 692 restricts many repayment obligations, it permits repayment provisions in several delineated circumstances:

• Loan repayment assistance or forgiveness programs “provided by a federal, state, or local governmental agency,”
• Repayment of the cost of tuition for a transferable education credential, provided that:
  • The repayment agreement is offered separately from any employment contract,
  • The transferable credential is not a condition of employment,
  • The employer specifies the repayment amount in advance and does not exceed the cost to the employer of the transferable credential,
  • The repayment agreement provides for a “prorated repayment amount during any required employment period that is proportional to the total repayment amount and the length of the required employment period and does not require an accelerated payment schedule if the worker separates from the employment,” and
  • Repayment is not required in the event a worker is terminated, unless the worker is terminated for misconduct.
• Contracts “related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards,”
• Contracts for discretionary or unearned monetary payments “at the outset of employment that is not tied to specific job performance” (e.g., signing bonuses) provided that:
  • Any repayment terms are enumerated in an agreement separate from an employment contract,
  • The worker is informed of the right to consult an attorney and provided at least five business days to do so prior to executing the repayment obligation agreement,
  • Repayment amounts do not accrue interest, are prorated based on the retention period (which may not exceed two years), and the worker is permitted to defer receipt until the end of his or her retention period,
  • The worker may elect to defer receipt of the payment to the end of his or her retention period without any repayment obligation, and
  • Repayment is required only in the event of voluntary separation or worker misconduct.
• Contracts relating to the lease, financing, or purchase of residential property.

Open Questions

• AB 692 leaves several issues unaddressed or partially addressed. We anticipate employers and workers alike will seek answers to the following questions, among many others:
  • Which workers are covered? AB 692 provides that a worker is “a natural person who is permitted to work for or on behalf of an employer or business entity, or who is permitted to participate in any other work relationship, job training program, or skills training program” and that the term worker, as defined, “includes, but is not limited to, an employee or prospective employee.” The law does not explicitly distinguish between employees, freelance workers, independent contractors, or other workers.
  • Which retention bonuses are covered? AB 692 permits required repayment of sign-on bonuses under certain circumstances but omits any explicit mention of bonuses not provided at the outset of employment.
  • What is the scope of “employment contracts"? AB 692 does not define “employment contract” for the purposes of its restrictions, leaving open questions about the breadth of its application. For example, the law does not explicitly address employment agreements tied to equity compensation, such as employer loans used to exercise stock options, purchase restricted stock, or participate in other incentive programs.
  • Will there be tax consequences for workers? AB 692 does not address the question of whether eliminating repayment obligations has tax consequences.

Takeaways for Employers

In light of these new requirements, businesses that employ California workers should consider:

• Reviewing offer letters, onboarding documents, and bonus agreements dated January 1, 2026, or later for compliance, paying attention to documents containing training repayment and tuition and bonus clawback provisions.
• Ensuring covered sign-on bonus terms are in standalone agreements and meet AB 692’s conditions.
• Informing human resources and recruiting teams of these new restrictions and exceptions.

We are working with clients to understand and comply with the new law. Please reach out to our team if you have questions or would like to discuss this further.