California’s AB 692 Reins in “Stay or Pay” Provisions in California Employment Agreements

Taylor C. Morosco ●

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California’s Assembly Bill (“AB”) 692 took effect on January 1, 2026, significantly limiting the use of commonplace “stay-or-pay” clauses in offer letters and agreements, which require employees or prospective employees to repay certain costs if their employment ends.

AB 692 underscores California’s commitment to limit the use of contractual provisions restricting or disincentivizing workforce mobility. Although the new law does not apply retroactively (essentially grandfathering in “stay-or-pay” clauses entered into before January 1, 2026), employers must audit agreements and practices, and plan for compliance to avoid significant potential liability going forward.

Prohibited Repayment Terms

Under the amended Business & Professions Code Section 16608 and Labor Code Section 692, employers may not:

  • require an employee to repay the employer, a training provider, or a debt collector for a debt (including, e.g., those payments that were made by an employer for training or relocation or in support of visa applications) when the employee’s employment ends;
  • trigger debt collection or end forbearance on a debt upon termination of an employee’s employment; or
  • impose any penalties, fees, or costs on an employee tied to the employee’s termination of employment.

Restrictions of this sort are now void as against public policy, absent compliance with limited statutory exceptions.

Key Exceptions

AB 692 does allow a few exceptions for particular types of agreements or practices, but only if they are precisely structured and implemented:

  1. Agreements for Deferral or Repayment of Discretionary, Unearned Sign-On/Retention Bonuses are permitted if:
  • the contract terms are outlined in an agreement signed “at the outset of employment that is not tied to specific job performance” and separate from the “primary employment agreement”;
    • the employee is notified of the right to consult an attorney and provided at least five business days to do so before signing the repayment agreement;
  • any repayment obligation for those not deferring receipt of the bonus (i) cannot be triggered other than by the employee’s voluntary resignation or a termination by the employer due to the employee’s misconduct, (ii) must be interest-free, and (iii) must be prorated based on the remaining retention period (which may not exceed two years).

2. Repayment Agreements Pertaining to Tuition Assistance for Transferable Credentials are permitted if:

  • the agreement is “offered separately from any contract for employment,” and the transferable credential is not required as a condition of employment;
    • the repayment amount is explicit and capped at the cost to the employer;
  • the repayment obligation cannot apply in the context of a termination of employment by the employer unless due to the employee’s misconduct.

3. Residential Leasing or Purchase Assistance.

4. Contracts “related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards.”

5. Loan Repayment and Forgiveness Programs “provided by a federal, state, or local governmental agency.”

Consequences of Non-Compliance

Violating AB 692 exposes employers to potentially significant risks:

  • Employees can bring private actions seeking actual damages or $5,000, whichever is greater, plus injunctive relief and attorneys’ fees.
  • The California Private Attorneys General Act (“PAGA”) may allow representative claims, increasing exposure.

Practical Next Steps for Employers

  • Audit existing agreements dated January 1, 2026, or later for compliance and reformat any non-compliant agreements or provisions.
  • Update template repayment provisions and agreements for new hires, retention programs, policies, and trainings going forward.
  • Use standalone signing/retention bonus agreements and tuition assistance agreements that are not presented as a term of employment within the employment agreement or offer letter or required to be signed as a condition of employment.
  • Train Human Resources, hiring managers, and legal teams to spot, remove, and/or revise invalid provisions.

This post is for informational purposes only and does not constitute legal advice. For guidance specific to your organization, please contact Blank Rome LLP.