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January 2, 2026 · Benjamin J. Treger
Effective January 1, 2026, Assembly Bill 692 fundamentally changes the rules for employment agreements that require workers to repay costs if they leave before a specified date. These provisions, sometimes called “stay-or-pay” clauses, have been a standard feature of sign-on bonus agreements, training repayment contracts, relocation reimbursement arrangements, and similar retention tools for decades. Under the new law, most of these clauses are now void and unenforceable in California.
This post explains what the statute prohibits, what narrow exceptions survive, and what employers should do now to bring their agreements into compliance.
The new law, codified in Business and Professions Code section 16608, prohibits employers from requiring a worker to execute a contract that conditions employment (or continued employment) on the worker’s agreement to repay any “debt” upon separation.
The statute defines “debt” broadly. It includes money, personal property, or their equivalent that is due (or alleged to be due) from a worker to another person, including for employment-related costs, education-related costs, or a consumer financial product or service. The definition applies regardless of whether the debt is certain, contingent, or incurred voluntarily.
In practical terms, this means that the following types of agreements are presumptively prohibited unless they fit within one of the statute’s narrow exceptions:
The statute also expressly prohibits contract terms that require workers to repay any “replacement hire fee, retraining fee, replacement fee, quit fee, reimbursement for immigration or visa-related costs, liquidated damages, lost goodwill, [or] lost profit” upon separation.
AB 692 does not ban all repayment arrangements. Two categories survive, but each is subject to strict requirements that employers must follow precisely.
An employer may require repayment of tuition assistance for a transferable credential (such as a degree, certificate, or professional license) if all of the following conditions are met:
| Requirement | Details |
|---|---|
| Separate agreement | The repayment obligation must be in a contract separate from the employment agreement. |
| Not a condition of employment | The credential cannot be required for the job. If the employer needs the credential as a condition of hire or continued employment, the exception does not apply. |
| Capped at cost | Repayment cannot exceed the actual cost of the credential to the employer. |
| Prorated repayment | Repayment must be prorated over the required employment period. No acceleration of the balance is permitted if the employee separates early. |
| No repayment on termination | The employer cannot require repayment if the employee is terminated, unless the termination is for misconduct. |
An employer may include a repayment or clawback provision for unearned monetary payments or bonuses given at the outset of employment, but only if all of the following conditions are met:
| Requirement | Details |
|---|---|
| Separate agreement | The terms must be set forth in a separate agreement from the employment contract. |
| Right to counsel | The employee must be notified of their right to consult an attorney and given five business days to do so before executing the agreement. |
| No interest | The repayment cannot be subject to interest accrual. |
| Prorated over ≤ 2 years | Repayment must be prorated based on the remaining term of the retention period, which cannot exceed two years. |
| Deferral option | The employer must offer the worker the option to defer receipt of the payment until the end of the fully served retention period, with no repayment obligation. |
| Voluntary separation or misconduct only | Repayment may only be required if the separation was at the sole discretion of the employee or the employer terminated the employee for misconduct. |
Key Takeaway: Both exceptions require a separate written agreement (not buried in the employment contract), prorated repayment (no lump-sum acceleration), and protection against repayment when the employer terminates the relationship without cause. These requirements are cumulative; failing to satisfy any single element renders the entire provision void.
AB 692 creates a private right of action under the Labor Code. An employee who prevails on a claim under this statute may recover:
The statutory damages floor of $5,000 per employee is significant. In a company with 50 affected workers, the minimum exposure is $250,000 in statutory damages alone, before accounting for attorney’s fees. Class or representative actions under PAGA could multiply this exposure further.
AB 692 applies only to contracts executed on or after January 1, 2026. Agreements entered into before that date remain governed by prior law. However, if an employer asks a current employee to sign a new or amended agreement after January 1, 2026, that agreement must comply with the statute.
The statute targets repayment obligations, not earned compensation structures. Performance-based bonus plans that vest over time, equity compensation with standard vesting schedules, and commission clawback provisions tied to customer cancellations within a defined period are likely outside the scope of the statute, though employers should review these arrangements carefully to ensure they do not inadvertently create a prohibited repayment obligation.
1. Audit existing template agreements. Review every standard-form agreement that includes a repayment, clawback, or reimbursement clause: offer letters, sign-on bonus agreements, relocation packages, training contracts, tuition reimbursement policies, and any agreements referencing visa sponsorship costs.
2. Separate repayment terms from employment contracts. Both exceptions require the repayment obligation to be in a standalone agreement. If your current practice bundles these terms into the offer letter or employment agreement, restructure them immediately for any new agreements.
3. Add the right-to-counsel notice for sign-on bonuses. The retention payment exception requires that the employee be notified of their right to consult an attorney and given five business days to do so. Build this notice and waiting period into your onboarding workflow.
4. Eliminate acceleration clauses. Both exceptions require proration. If your current agreements require full repayment of the remaining balance upon early separation, those provisions will not survive under the new law.
5. Remove repayment-on-termination provisions. Under both exceptions, repayment can only be triggered when the employee voluntarily resigns or is terminated for misconduct. Provisions that require repayment upon any termination (including layoff or without-cause termination) are not permitted.
6. Offer the deferral option for retention payments. The sign-on bonus exception requires that the employer give the worker the option to defer receipt until the retention period is fully served. If the worker elects deferral and serves the full period, there is no repayment obligation. This must be a genuine election, not a buried formality.
This post is for informational purposes only and does not constitute legal advice. Consult with a qualified employment attorney about your specific situation.