California AB 692 bans most stay-or-pay employment clauses starting Jan 1, 2026. In this alert, we discuss what is prohibited, narrow exceptions, and compliance steps for employers.
What AB 692 prohibits
Under AB 692, employment agreements entered into on or after January 1, 2026, may not include contract terms that:
- Require a worker to pay an employer, training provider, or debt collector for a debt if the worker’s employment terminates;
- Authorize the employer, training provider, or debt collector to resume or initiate collection of, or end forbearance on, a debt if the worker’s employment terminates; or
- Impose any penalty, fee, or cost on a worker if the worker’s employment terminates.
Limited carve-outs
AB 692 provides a few narrow exceptions, each with strict conditions that must be satisfied.
Discretionary sign-on payments/retention bonuses
Under AB 692, an employer may include a repayment obligation for a discretionary or unearned monetary payment at the outset of employment (that is, when an individual is newly hired or returns to employment after a previous departure). The repayment obligation may not be tied to specific job performance and certain conditions must be met.
- First, the repayment obligation must be memorialized in a separate, written agreement.
- Second, before agreeing, the employee must be given at least five business days’ notice and expressly notified of the right to consult with legal counsel.
- Third, the length of time the employee must remain employed to avoid repayment may not exceed two years from the date of payment.
- Fourth, any repayment obligation must be prorated and interest‑free. For example, if an employee resigns halfway through a two‑year retention period, the employee may be required to repay only half of the bonus.
- Fifth, repayment may be triggered only if the employee voluntarily resigns or is terminated for misconduct; termination for reasons other than misconduct may not trigger repayment.
- Sixth, the employer must offer the employee the option to defer receipt of the payment until completion of the full retention period, in which case no repayment obligation may be imposed.
Tuition reimbursement carve-out
Tuition reimbursement is allowed only if the education program provides transferable credentials unrelated to the employee’s current position. However, any repayment terms must be clearly disclosed, prorated, interest-free, and may not be triggered by termination unless the employee is dismissed for misconduct.
Apprenticeships
AB 692 specifically exempts contracts that are related to enrollment in apprenticeship programs approved by the Division of Apprenticeship Standards (DAS). This exemption acknowledges that state‑regulated apprenticeship programs operate under a separate, comprehensive statutory and regulatory framework that already governs the terms and costs of apprenticeship training in California. Importantly, the exemption applies only to bona fide apprenticeship programs that the DAS has formally approved under California’s Labor Code and apprenticeship regulations. These approval criteria derive from California’s apprenticeship statutes and regulations, not from AB 692 itself.
Government programs
Agreements under loan repayment assistance or loan forgiveness programs provided by federal, state, or local government agencies are exempt.
Penalties and enforcement risks for employers
AB 692 introduces Labor Code §926, which grants employees the right to bring civil actions against employers who include prohibited clauses in agreements signed on or after January 1, 2026. Available remedies include the greater of actual damages or $5,000 per employee, injunctive relief, and recovery of attorneys’ fees and costs.
Key takeaways for employers
Employers should take immediate steps to prepare for AB 692 by conducting a thorough review of all employment documents to identify and phase out any provisions that may violate AB 692. For employers planning to continue permitted exceptions, such as tuition reimbursement or retention bonuses, contracts must be carefully structured to meet all statutory conditions.