Employers throughout the United States often offer to pay for employees’ training, school tuition, or other benefits so long as the employee receiving the benefit executes an agreement agreeing to remain employed for a specified amount of time following the receipt of the benefit. In the event the employee’s employment terminates before the specified time, the employer is entitled to seek repayment from the employee. Although these stay-or-pay agreements are commonly used, on January 1, 2026, they will be unlawful in California.
On September 11, 2025, the California Legislature passed Assembly Bill 692 and sent it to Governor Gavin Newsom’s desk to be signed into law. On October 13, 2025, Newsom signed into law AB 692, which makes it unlawful for employers to include stay-or-pay provisions in employment contracts with limited exceptions. AB 692 states that a contract that violates the new law constitutes “a contract restraining a person from engaging in a lawful profession, trade, or business, and is void under [California Business and Professions Code] Section 16600.” Put another way, stay-or-pay contracts might lead employees to believe they cannot leave and operate as de facto noncompete agreements, which violate existing California law.
Pursuant to the new law, employment contracts entered into after January 1, 2026 (i.e., the new law will not have retroactive effect), cannot lawfully:
- “require[] the worker to pay an employer, training provider, or debt collector for a debt if the worker’s employment or work relationship with a specific employer” ends
- “[a]uthorize[] the employer, training provider, or debt collector to resume or initiate collection of or end forbearance on a debt” if the worker’s employment with the employer ends
- “[i]mpose[] any penalty, fee, or cost on a worker if the worker’s employment or work relationship” with the employer ends
California’s new law contains a narrow set of exceptions. For instance, the new law does not prohibit:
- “[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 enrollment in an apprenticeship program approved by the [state] Division of Apprenticeship Standards”
- tuition repayment for a transferable credential that “is offered separately from any employment contract” and does not require repayment to the employer if the worker is terminated, except if the worker is dismissed for misconduct
In the case of the third exception listed above, the contract must not require obtaining a transferable credential as a condition of employment. Additionally, it must specify the repayment amount before the worker agrees to the contract.
Employers may also continue utilizing retention bonuses after January 1, 2026, so long as certain conditions are met. For instance, the retention bonus cannot be tied to specific job performance, any repayment requirements must be in an agreement separate from the primary employment contract, and repayment obligations for early separation cannot accrue interest, among other things.
Importantly, AB 692 grants employees a private right of action against their employer. Specifically, Section 926 of the California Labor Code was amended to state that “[a] worker who has been subjected to the conduct prohibited by subdivision (b) of Section 16608 of the Business and Professions Code or a worker representative may bring a civil action on behalf of that worker, other persons similarly situated, or both, in any court of competent jurisdiction.” Employees advancing successful civil claims under the new law will be entitled to a minimum statutory penalty of $5,000 or their actual damages, whichever is greater. In addition to monetary penalties, a successful claimant under the new law can also obtain injunctive relief and reasonable attorneys’ fees and costs associated with their pursuit of the claim.
Although many employers have a set cadence for the review of employment policies and practices to ensure compliance, they may want to consider doing a specific evaluation of their clawback practices prior to January 1, 2026.
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