California employers, must review their employment contracts. A new law, Assembly Bill 692 (AB 692), is set to take effect on January 1, 2026, with the goal of prohibiting certain “stay-or-pay” clauses in employment and training agreements. This legislation aims to protect workers from being forced to pay employers, training providers, or debt collectors for costs if their employment ends.
The new law is designed to strengthen existing protections against contracts that restrain an individual from engaging in a lawful profession, trade, or business. It makes it unlawful for any employer to include terms in employment contracts that require a worker to pay a debt, or impose any penalty, fee, or cost if the worker’s employment or work relationship terminates.
What AB 692 Prohibits
AB 692 specifically targets a variety of financial arrangements that have become more common, particularly those known as Training Repayment Agreement Provisions (TRAPs) and other “stay-or-pay” schemes. The law defines “penalty, fee, or cost” broadly to include items such as:
- Replacement hire fees
- Retraining fees
- “Quit fees”
- Reimbursement for immigration or visa-related costs
- Liquidated damages
- Lost goodwill or profits
These provisions are now considered void and contrary to public policy in California for any contracts entered into on or after January 1, 2026. The law also explicitly states that a worker or their representative can bring a civil action on their own behalf or on behalf of other similarly situated workers. A violating employer may be liable for the greater of the worker’s actual damages or $5,000 per worker, in addition to injunctive relief and attorney’s fees and costs.
Key Exceptions to the New Law
While the new law is broad, it does include specific exceptions that allow for certain types of agreements under strict conditions. These include:
- Tuition Reimbursement for Transferable Credentials: Employers can still enter into contracts for the repayment of tuition for a transferable credential (such as a degree from an accredited third-party institution). However, this requires a separate agreement from the primary employment contract, and the credential cannot be a condition of employment. The repayment amount must be prorated and cannot exceed the employer’s actual cost. Repayment also can’t be required if the worker is terminated, unless it is for misconduct.
- Retention Bonuses: Employers may offer hiring or retention bonuses with a repayment obligation for early departure. The terms must be in a separate agreement, and the employee must be given at least five business days to consult with an attorney before signing. The repayment must be interest-free, prorated over a retention period not exceeding two years, and only apply if the employee leaves voluntarily or is terminated for misconduct.
- Apprenticeship Programs: The law does not apply to contracts related to enrollment in apprenticeship programs approved by the Division of Apprenticeship Standards.
- Governmental Loan Programs: Contracts under federal, state, or local governmental loan repayment or forgiveness programs are also exempt.
Next Steps for Employers
With AB 692 going into effect in early 2026, employers should take proactive steps to ensure their compliance:
- Review Existing Contracts: Audit all current employment, training, and bonus agreements to identify any “stay-or-pay” or similar clauses that may be prohibited under the new law. While the law is not retroactive, it’s essential to understand its implications for future hires.
- Update Your Contracts: If you plan to continue offering tuition reimbursement or retention bonuses, work with legal counsel to draft new agreements that comply with the strict requirements of AB 692’s exceptions. Ensure these new agreements are separate from your standard employment contracts and include all the necessary disclosures and timeframes.
- Consult with Legal Counsel: The new law is complex, and penalties for non-compliance can be significant. It is highly recommended to seek expert legal advice to navigate these changes and protect your organization from potential litigation.
