California AB 692: Stay-or-Pay Agreements Are Banned Starting January 1, 2026

If your company uses training repayment agreements or sign-on bonus clawbacks for California workers, those provisions are likely unenforceable as of January 1, 2026. Relocation cost recovery clauses may also be affected under the law's broad "debt" definition.

Status: Signed into law — in force and unchallenged as of mid-2026 Effective Date: January 1, 2026 Applies To: All employers with workers in California — no size threshold Category: Non-Compete / Employment Contract Restrictions Statute: Adds Business & Professions Code § 16608 (the core prohibition and penalties) and Labor Code § 926

What Changed

California has joined a growing list of states cracking down on "stay-or-pay" provisions — contract terms that require workers to repay their employer for training costs, relocation expenses, sign-on bonuses, or other work-related costs if they leave the job before a set period.

AB 692 makes it unlawful for employers to include any provision in an employment contract that:

Requires a worker to repay a "debt" if the employment relationship ends
Permits the employer to collect on a debt upon termination
Imposes any penalty, fee, or cost — including replacement-hire fees, retention fees, quit fees, immigration or visa-related cost reimbursement, or liquidated damages — triggered by the end of employment

The law applies broadly. The statute defines "worker" as "a natural person who is permitted to work for or on behalf of an employer" and specifies this "includes, but is not limited to, an employee or prospective employee." Notably, an earlier draft of AB 692 explicitly listed independent contractors, freelancers, interns, and sole proprietors — those references were removed from the final version, leaving the scope ambiguous for non-employee workers. The broad "includes, but is not limited to" language suggests potential coverage beyond traditional employees, but this will likely require judicial interpretation. There is no employer size threshold — this applies to every employer with workers in California, from a 5-person startup to a Fortune 500 company.

Contracts entered into on or after January 1, 2026 that contain prohibited provisions are void. Existing contracts signed before that date are grandfathered, but employers should still review them — enforcement trends suggest that attempting to collect on pre-2026 agreements may invite scrutiny.

As of mid-2026, the law is in force and has not been enjoined, delayed, or narrowed — and no implementing regulations, DLSE guidance, or litigation challenging it have surfaced. For employers, that means the January 1, 2026 obligations are live and there is no grace or "cure" period to wait out.

Who This Affects

Employer size: All employers — no minimum employee count
Location: Any employer with workers performing work in California
Worker type: Employees and prospective employees (explicitly). Freelancers, independent contractors, and training program participants may also be covered — the statute uses broad "includes, but is not limited to" language, but the final version removed explicit references to non-employee categories that appeared in earlier drafts
Industries most impacted: Healthcare (residency/training programs), technology (sign-on bonuses with clawbacks), staffing/recruiting (training cost recovery), trucking/transportation (CDL training repayment), finance (relocation cost recovery)

What's Still Allowed

AB 692 includes several narrow exceptions. Employers can still require repayment in these specific situations:

Tuition reimbursement — but only if:

The agreement is separate from the employment contract (not buried in an offer letter)
The credential earned is transferable (not company-specific training)
The credential is not required for the job
The repayment amount doesn't exceed actual employer costs
Payments are prorated over the employment period (no acceleration clauses)
No repayment may be required if the worker is terminated for any reason other than misconduct (the statutory trigger is termination for misconduct, not a "with/without cause" standard)

Sign-on bonuses — but only if:

The terms are in a standalone agreement (separate from the employment contract)
The worker is given at least 5 business days to consult an attorney before signing
No interest accrues on the repayment amount
Repayment is prorated over a maximum 2-year retention period
The worker can defer receiving the bonus without triggering a repayment obligation
Repayment is only required upon voluntary resignation or termination for misconduct

Apprenticeship contracts approved by the Division of Apprenticeship Standards and government-sponsored loan repayment programs are also exempt.

Key nuance: Notice how specific these exceptions are. A sign-on bonus clawback that was perfectly standard in 2025 — "repay the $10,000 bonus if you leave within 2 years" — is now only enforceable if it meets every one of those conditions. Most existing sign-on bonus agreements will not.

What Employers Need to Do

Audit all employment contracts, offer letters, and onboarding documents for stay-or-pay provisions — by now (these should already be updated) Who: HR Director + Legal Counsel
Revise sign-on bonus agreements to meet the new standalone agreement requirements — immediately for any new offers Who: HR / Recruiting team
Ensure tuition reimbursement agreements are in separate documents and meet all 5 prong requirements — immediately Who: HR / Learning & Development
Remove training repayment clauses from employment contracts for California workers — any clause requiring repayment of company-specific training costs that don't meet the tuition exception is now void Who: HR + Legal
Train recruiting and HR staff on the new restrictions — recruiters need to know they can't promise sign-on bonuses with clawbacks unless the new requirements are met Who: HR Director
Consult employment counsel on existing pre-2026 agreements — while grandfathered, attempting to enforce them post-2026 carries risk Who: Legal Counsel

Penalties for Non-Compliance

AB 692 creates a private right of action — meaning individual workers can sue. Employers found liable face:

$5,000 per affected worker (minimum) or actual damages, whichever is greater
Injunctive relief — a court can order the employer to stop enforcing the provision
Attorneys' fees and costs — the employer pays the worker's legal bills

At $5,000 per worker, a company with 50 California workers on contracts with prohibited provisions faces up to $250,000 in potential exposure, plus legal fees. And unlike some labor code violations, there's no "cure" period — the provision is void on its face.

What This Means for Multi-State Employers

California is not alone. New York signed its "Trapped at Work Act" into law on December 19, 2025, banning employment promissory notes and training repayment agreements. However, the Act was subsequently amended on February 13, 2026 — the effective date was delayed by roughly a year (the amendment replaced "immediately" with "one year after it shall have become law," which employment counsel read as either December 19, 2026 or February 13, 2027; that ambiguity is still unresolved), the scope was narrowed to cover "employees" only (excluding independent contractors, interns, and volunteers), and new carve-outs for transferable credentials and certain benefit repayments were added. Several other states also have restrictions on training repayment agreements in various forms.

For multi-state employers, the practical implication is this: if you use any form of stay-or-pay agreement, you can no longer use a single national template. You need state-specific versions — or, increasingly, consider whether these agreements are worth the legal complexity at all.

The trend is clear: states are treating stay-or-pay provisions as a form of non-compete — a mechanism that traps workers in jobs they'd otherwise leave. Expect more states to follow California's lead.

Sources

This analysis is for informational purposes only and does not constitute legal advice. No attorney-client relationship is created by reading this content. Consult a licensed employment attorney for guidance specific to your organization.

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