“Stay-or-Pay” Agreements Prohibited After the New Year
Effective January 1, 2026, California’s Assembly Bill 692 will continue the state’s longstanding trend of broadening worker mobility protections by prohibiting most forms of “repayment on separation” provisions in new employment agreements. The new law, AB 692, directly targets contractual provisions that require workers to repay training expenses, tuition, bonuses, or other employer-funded investments if they end their employment or working relationship before a specified period.
For any contract entered into on or after the effective date of the bill, the entire contract will be null and void if it (1) requires the worker to repay a debt or sum of money because their employment or work relationship ends; (2) authorizes an employer to initiate, accelerate, or resume collection activity when employment or other work relationship ends; or (3) imposes any cost, fee, interest charge, or penalty tied to separation. To be clear, the law does not prevent employers from pursuing reimbursements of amounts paid to employees if the employee voluntarily resigns or is terminated for misconduct (as defined under the Labor Code). The purpose of the law is to prevent contractual repayment terms that are inconsistent with California’s strong public policy against restraints on worker mobility, the same policy underlying the state’s prohibition on non-compete clauses.
The statute contains notably strong enforcement provisions. Workers will have a private right of action if they have been “subjected to the conduct prohibited” by the law; namely, if they were required to execute, or were bound by, a contract containing one of the prohibited repayment-on-termination terms. Workers will be authorized to sue individually or on behalf of similarly situated workers, allowing both individual and representative litigation. A violating employer will be liable for actual damages or a statutory penalty of $5,000 per affected worker, whichever is greater, as well as reasonable attorneys’ fees, costs, and injunctive relief. AB 692 also provides that its remedies will be cumulative, permitting plaintiffs to pursue related claims under the Unfair Competition Law, other Labor Code provisions, or restitutionary theories.
- Discretionary sign-on, retention, and relocation bonuses, if:
- the bonus agreement is separate agreement from the employment contract;
- the worker is notified that they have at least five business days to consult an attorney;
- the repayment obligation is prorated, interest-free, and tied to a retention period of no more than two years;
- the worker may defer receipt of the bonus to avoid potential repayment; and
- repayment may be triggered only by voluntary resignation or misconduct.
- Tuition-repayment agreements for a transferable credential, if:
- the agreement is a separate stand-alone contract;
- the credential is not required for the worker’s current job;
- repayment is limited to the employer’s actual cost;
- the repayment schedule is strictly prorated and non-accelerating; and
- repayment is owed only if the worker is terminated for misconduct.
- Government loan-assistance and loan-forgiveness programs;
- State-approved apprenticeship programs; and
- Residential property financing and leasing arrangements.
The combined effect of these provisions is to create potentially significant legal exposure for employers that continue to rely on contract templates containing prohibited repayment provisions.
Employers doing business in California should re-evaluate how they structure offer letters and other employment agreements to identify payments offered in exchange for a worker’s promise to repay upon termination of employment within a certain time frame. Although agreements executed before 2026 are not automatically invalidated, renewing, extending, or amending them may bring them within the statute’s reach. Employers should therefore conduct a comprehensive review of any agreement that could contain repayment triggers tied to separation, including training reimbursement forms, credentialing agreements, sign-on and retention bonus documents, relocation agreements, and onboarding materials and amend as necessary to fall within an exception, if possible. HR, recruiting, and legal teams should discontinue outdated templates and ensure that future agreements exclude prohibited terms. Failure to do so may result in the loss of bonuses paid to employees who quit in the near term when repayment was previously promised, as well as significant penalties and protracted litigation.
If you have any questions regarding compliance with AB 692, please contact Baker Gerwig and/or Hieu Williams in the San Francisco office of Hirschfeld Kraemer LLP. Baker can be reached at 415-835-9029 or bgerwig@hkemploymentlaw.com. Hieu can be reached at 415-835-9020 or hwilliams@hkemploymentlaw.com.