California Bans Stay-or-Pay Employment Clauses

Newly enacted California Assembly Bill 692 bans contracts that require employees to repay broadly defined “debts” upon leaving their employer, unless their agreements satisfy certain exceptions. The new statute is aimed at limiting the use of “exit fees” or “stay or pay” clauses with employees who leave their employer before the end of a specified term, which the bill’s authors contend limit labor force mobility in violation of California’s prohibitions on restraints on trade. This statute will likely materially alter the way many of the state’s employers incentivize their workforce to remain employed.

The new law is the most comprehensive of its kind to date, with similar legislation pending in New York.

PROHIBITED CONTRACT TERMS

Effective January 1, 2026, AB 692 adds two new statutory provisions—Business and Professions Code Section 16608 and Labor Code Section 926—that prohibit employers from including in any “employment contract,” or requiring “as a condition of employment or work relationship” execution of a contract that includes, a contract term that does any of the following:

• Mandates a worker (e.g., employee or prospective employee) to pay an employer, training provider, or debt collector a “debt” if employment or a work relationship ends
• Permits the resumption or initiation of debt collection, or the termination of debt forbearance, upon separation from a specific employer
• Imposes penalties, fees, or costs—ranging from replacement hire and retraining fees to quit fees, reimbursement for immigration or visa costs, liquidated damages, lost goodwill, and lost profit—upon termination from a specific employer

The term “debt” as used in the statute is broad and includes money, personal property, or their equivalent that is due or owing or alleged to be due or owing from a natural person to another person, including employment-related costs, education-related costs, or a consumer financial product or service, regardless of whether the debt is certain, contingent, or incurred voluntarily.

The law is not retroactive, meaning it does not apply to contracts entered before January 1, 2026.

EXCEPTION: RETENTION BONUS REPAYMENT

Notwithstanding its broad prohibitions, AB 692 delineates several exceptions. One such exception is for agreements for the receipt of discretionary or unearned monetary payments (including a financial bonus) at the outset of employment that are not tied to specific job performance, provided that all of the following conditions are met:

• The provided repayment terms are in an agreement separate from the primary employment contract
• Employees are provided with the opportunity to consult counsel and a reasonable time to do so of not less than five business days before executing the agreement
• Any repayment obligation for early separation from employment is not subject to interest accrual and is prorated based on any retention period’s remaining term, which cannot exceed two years from the payment to the employee
• The worker has an option to defer receipt of the payment to the end of a fully served retention period (not to exceed two years) without any repayment obligation
• Separation from employment before the retention period ends must be at the employee’s sole election or at the employer’s election for employee “misconduct” as defined in California Unemployment Insurance Code Section 1256

EXCEPTION: TUITION REPAYMENT

Another exception includes a contract related to the repayment of tuition costs if such contract

• is separate from any contract for employment;
• does not make obtaining the credential a condition of employment;
• specifies the repayment amount before the worker agrees to the contract and the repayment amount does not exceed the cost to the employer of the transferable credential received by the worker;
• prorates repayment over any required employment period that is proportional to the total repayment amount and the required employment period’s duration, and does not require an accelerated payment schedule if the worker separates from the employment; and
• exempts workers from repayment if the worker is terminated unless the termination is for “misconduct” as defined in Unemployment Insurance Code Section 1256.

ADDITIONAL EXCEPTIONS

• A contract related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards
• A contract entered into under any loan repayment assistance program or loan forgiveness program provided by a federal, state, or local governmental agency
• A contract related to the lease, financing, or purchase of residential property, including a contract pursuant to the California Residential Mortgage Lending Act

EXPANSIVE CIVIL REMEDIES AND ENFORCEMENT MECHANISMS

AB 692 contains extensive remedies and enforcement mechanisms. The new law empowers workers and their representatives to bring civil actions against violators in any court of competent jurisdiction. Prevailing plaintiffs are entitled to actual damages or a minimum of $5,000 per affected worker (whichever is greater), injunctive relief, and reasonable attorney fees and costs. The law also allows workers to bring claims on behalf of other employees “similarly situated.”

The law further clarifies that these remedies are cumulative, preserving remedies under such other statutes as the Unfair Competition Law (Business and Professions Code Section 17200), Labor Code Section 2802, and Article 1.5 (commencing with Section 2775) of Chapter 2 of Division 3 of the Labor Code.

Employees also might seek to bring claims under existing Business and Professions Code provisions related to restraints on trade. Whether such claims would be viable will be an issue for courts and arbitrators to determine. 

FUTURE LEGISLATION AND IMPACT OF THE COLLECTIVE BARGAINING PROCESS

AB 692 does not specifically address collective bargaining, a fact that did not escape Governor Newsom. In the governor’s Signing Statement accompanying AB 692, he stated that “there is still more work to be done,” encouraging the legislature to enact “follow-up legislation in 2026 to accommodate the collective bargaining process.”

Such legislation would be appropriate, the Signing Statement continued, because collective bargaining agreements are “tailored to the unique needs of workers and employers.” California employers consequently should expect further legislation in 2026, likely affecting unionized employers.

NEXT STEPS

As California employers begin to face these substantial new compliance obligations, proactive steps can help mitigate risk. Specifically, employers should consider the following:

• Employers should audit and revise employment contracts and related agreements to ensure any repayment, penalty, or fee provisions meet the requirements of AB 692.
• Any “advances,” including related to commissions, may also come under scrutiny (even while not wages).
• AB 692 provides that, with tuition or sign-on bonus agreements, repayment amounts can only be owed if the employee voluntarily terminates from employment or is terminated for misconduct. California employers will face the risk of litigation if the employee resigns but claims constructive discharge or otherwise alleges that their resignation is not “solely” voluntary. As a result, employers should carefully document employee voluntary resignations. Letters accepting an employee’s resignation should make clear that the resignation was voluntary and “solely” at the employee’s election.

Employers, training providers, and their attorneys should proactively review existing contracts, educate staff, and prepare for the new compliance environment ahead of January 2026.