“Stay or Pay” Is Out: What California’s AB 692 Means Starting January 1, 2026
Effective January 1, 2026, California law limits the use of so-called “stay or pay” provisions in employment contracts through Assembly Bill 692 (AB 692). These provisions, often referred to as Training Repayment Agreement Provisions or “TRAPs, historically required workers to stay with an employer for a set period or repay bonuses, training costs, relocation expenses, or other employment-related costs if their employment ended early.
For many employers, these clauses have been a tool to protect investments in recruitment, speclalized training, and relocation assistance. From the employee’s perspective, however, these provisions could act as a financial deterrent to leaving, functioning as a monetary restraint on career mobility. Lawmakers in California have more explicitly curtailed these practices statewide, adding Business and Professions Code section 16608.
What AB 692 Prohibits
Under AB 692, employers can no longer include in employment agreements any term that:
- Requires an employee or prospective employee to repay the employer, a training provider, or a debt collector for a “debt” if the worker’s employment relationship ends, including training, relocation, or incentive costs;
- Authorizes an employer or third party to initiate or resume collection of a debt or to end forbearance on a debt when employment terminates; or
- Imposes any penalty, fee, or cost tied to termination of employment.
These prohibited terms are now considered void and unenforceable under California public policy. The law applies only to contracts entered into on or after January 1, 2026 and does not automatically void existing agreements signed before that date.
Why the Law Was Enacted
California has a longstanding policy favoring employee mobility. With limited exceptions, the state already broadly prohibits non-compete agreements, under Business and Professions Code section 1600, et seq., when they restrict a worker’s ability to pursue employment freely. AB 692 continues this trend by targeting contractual repayment obligations that effectively act as economic restraints on employees who choose to leave their jobs.
Supporters of AB 692 view many “stay or pay” provisions as unfair to workers, arguing they can trap employees in roles or with employers against their interests, particularly when unexpected opportunities arise. By eliminating most such provisions, the law seeks to promote freer movement and competition within the labor market.
Narrow Exceptions: Allowed Repayment Terms With Strict Conditions
AB 692 does not categorically ban all repayment terms. The statute includes limited exceptions, but only where very specific conditions are met. Examples include:
Sign-on and Retention Bonuses
Employers may structure repayment obligations for discretionary or unearned bonuses, like “signing bonuses,” under strict safeguards:
- The repayment terms must be documented in a separate written agreement apart from the main employment contract;
- Employees must be advised of their right to legal counsel and given at least five business days to seek advice before signing;
- Employees have the option to defer receipt of the payment to the end of the fully served retention period without any repayment obligation;
- Repayments must be prorated over a defined retention period (not exceeding two years from the receipt of the payment) and may not accrue interest;
- Repayment may be triggered only if the employee voluntarily leaves early or is terminated for misconduct.
Tuition and Educational Costs
Agreements requiring repayment of tuition for a transferable credential (e.g., accredited degrees) may be permitted if all statutory requirements are satisfied, such as being separate from the employment contract, prorated, not a condition of employment, and other requirements.
Apprenticeship Programs and Government Loan Programs
Certain repayment arrangements tied to approved apprenticeship programs or government-sponsored loan/forgiveness programs are also excluded from the general restriction, provided they meet the statutory criteria.
These exceptions are narrowly tailored and include procedural safeguards designed to ensure employees are fully informed and not coerced into unfair repayment terms.
Penalties and Employer Risk
AB 692 creates a private right of action to redress violations. Employees (or applicants) affected by prohibited clauses may pursue legal remedies, including:
- The greater of atual damages or minimum statutory damages of $5,000 per employee),
- Injunctive relief to prohibit future violations,
- Recovery of attorneys’ fees and costs.
Given these potential liabilities, employers should proactively review and update all employment contracts, offer letters, bonus agreements, and repayment policies to ensure compliance effective January 1, 2026.
Conclusion
Assembly Bill 692 represents an expansion of California’s public policy favoring free movement and competition by employees within the labor market. By significantly constraining “stay or pay” provisions tied to continued employment and trimming back financial restraints on workers, the law enhances employee mobility and aligns contractual practices with longstanding principles prohibiting coercive employment contract terms. Employers must adapt their compensation and retention strategies to align with these new rules.
Employers evaluating the impact of AB 692 on their existing or future agreements should seek advice from experienced California employment counsel.