It’s a Trap! California Bans Stay-or-Pay Provisions in Employment Contracts

Governor Newsom has signed Assembly Bill (“AB”) 692 which makes it unlawful to include in employment contracts any terms that require a worker to repay a debt if their employment ends, subject to a few exceptions. Historically, some employers offer to pay for employee training, school tuition, or other benefits, on the condition that the employee remain employed for a specific period of time. In these circumstances, employees who leave their employment before the promised period of time are usually contractually obligated to repay the employer’s costs. AB 692 was enacted in response to public policy concerns that these types of “stay-or-pay” contracts are unfair because they restrict an employee’s ability to freely seek new employment due to repayment obligations.  However, there are some exceptions employers need to be aware of.

What do employers need to know about AB 692? 

AB 692 will apply to employment contracts entered into on or after January 1, 2026, and will apply to all employers in California. Under the new law, it will be unlawful to include terms in employment contracts that require workers to pay employers penalties or fees, or repay costs incurred by the employer on the employee’s behalf, if the employment relationship ends.

Are there any exceptions?

Yes, some contracts for repayment are still permitted under the law:

• Contracts entered under a loan repayment assistance program or loan forgiveness program provided by a federal, state, or local government agency.
• Contracts related to the repayment of the cost of tuition for a transferable credential, provided that the contract:
  • • is separate from the employment contract;
    • does not make obtaining the transferrable credential a condition of employment;
    • specifies a repayment amount not exceeding the cost of the credential to the employer;
    • provides for prorated repayment without acceleration; and
    • does not require repayment unless the worker is terminated for misconduct.
• Contracts related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards. 
• Contracts for the receipt of a discretionary or unearned monetary payment at the outset of employment, including a financial bonus, not tied to specific job performance, provided that: 
  • the terms of repayment are separate from the employment contract;
  • the employee is notified of their right to consult an attorney about the agreement and provided not less than five business days to do so;
  • repayment is prorated based on the remaining term of any retention period which must not be more than two years, without interest accrual;
  • the worker may defer receipt of the payment to the end of the retention period without repayment obligations; and
  • separation is either at the employee’s sole discretion or due to employee misconduct.
• Contracts related to the lease, financing, or purchase of residential property.

One additional note, costs associated with immigration or visa-related costs cannot be clawed back.  The new legislation considers them a “penalty” if the cost is imposed on the employee under the new statute.

Many of these exceptions are narrow and nuanced.  We suggest reaching out to your counsel to discuss whether your current agreements need to be altered to fit within these requirements.

What happens if an employer doesn’t comply with AB 692?

Not complying with AB 692 can expose employers to liability, including minimum damages of $5,000 per affected worker, injunctive relief, and attorneys’ fees and costs associated with the worker having to bring a lawsuit.

What can employers do now?  

AB 692 goes into effect on January 1, 2026, and in the meantime, employers should promptly review and update their employment contracts and practices to ensure compliance with this new law. Employers should take immediate action including:

• Review and Revise Contracts: Audit all existing employment, incentive, and training agreement templates to identify and remove any provisions that may violate AB 692.
• Carefully Look at Exception-Based Contracts: Ensure that agreements that qualify for statutory exceptions (such as tuition repayment, bonuses, or apprenticeship programs) are clearly separated from general employment contracts and that all specific legal requirements are met under AB 692.
• Update Training and Credentialing Strategies: Update any internal training, onboarding, or credentialing practices to align with AB 692’s requirements, and train HR and legal teams on related compliance.

Please reach out to your Stradling attorney if you have any questions, or need assistance with your businesses’ compliance with the ever changing California employment laws.