California Rings in the New Year With Restrictions on “Stay-or-Pay” Agreements

On October 13, 2025, Governor Gavin Newsom of California signed into law Assembly Bill 692 (AB 692), which becomes effective on January 1, 2026. AB 692 restricts employers from imposing employment contract provisions and arrangements that require employees to reimburse their employers for certain expenses if their employment ends.

The bill prohibits employers from requiring contract provisions that require an employee to reimburse their employer, a training provider or a debt collector for debts upon termination of an employment relationship. Additionally, AB 692 prohibits employers from including provisions that impose penalties or fees on an employee or allows debt collection if his or her employment ends.

These “stay-or-pay” provisions have become commonplace, requiring employees to reimburse their employers for incentive or retention bonuses, training programs or other expenses if the employment relationship terminates before a specified date or time period. Once AB 692 becomes effective, employees will be able to pursue a private right of action against employers who violate the law. Employees can collect a minimum of $5,000 in damages, including injunctive relief and attorneys’ fees and costs, for violations.

Both employers and employees should be mindful of the exceptions to AB 692 that allow repayment provisions for the following circumstances:

• Loan repayment assistance programs or loan forgiveness programs “provided by a federal, state, or local governmental agency.”
• Repayment of tuition costs for a transferable credential that meets the following requirements:
  • The agreement is separate from any employment contract;
  • Obtaining a transferable credential is not a condition of employment;
  • Before the employee signs the agreement, the agreement specifies the repayment amount, which may not exceed the cost to the employer; and
  • The employee is terminated for misconduct.
• Contracts for “enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards.”
• Contracts for discretionary or unearned monetary payment, “at the outset of employment that is not tied to specific job performance,” provided that:
  • Repayment obligations and terms are in a separate contract from the employment agreement;
  • Employees are notified of their right to consult an attorney regarding the contract and are provided at least five business days to do so;
  • The employee can defer receipt of payment until the end of their retention period without any repayment obligations; and
  • The employee voluntarily resigns or is terminated for employee misconduct.

Employers should take careful steps to audit their employment contracts, agreements and other policies to ensure compliance with AB 692. Contracts that fall under the exceptions of AB 692 should be carefully drafted in agreements separate from general employment agreements.