California’s AB 692 Significantly Restricts “Stay-or-Pay” and Repayment Provisions in Employment Agreements

The statute reflects the Legislature’s continued focus on employee mobility and wage protection and will require many employers to revisit compensation and incentive practices.

Although the statute does not apply retroactively, it governs new employment agreements and incentive arrangements beginning in 2026, making compliance planning critical.

What Is Prohibited
Under AB 692, employers may not include in employment contracts terms that:

• Mandate repayment of a debt to the employer, a training provider or a debt collector if the worker’s employment or work relationship ends;
• Authorize the employer or debt collector to initiate or resume collection of a debt, or to end forbearance on a debt, upon termination of employment; or
• Impose a penalty, fee or cost on a worker in connection with the termination of the employment or work relationship.

Statutory Exceptions Under AB 692
Although AB 692 broadly restricts “stay-or-pay” and repayment provisions, the statute sets forth several specific and narrowly drawn exceptions:

Retention Bonus Repayment
AB 692 permits limited repayment obligations for certain discretionary or unearned monetary payments, including sign-on or retention bonuses, provided that strict procedural and substantive safeguards are met:

• Repayment terms must be set forth in a separate stand-alone agreement from the primary employment contract.
• Employees must be notified of their right to consult counsel and be given a reasonable opportunity—no fewer than five business days—to consult counsel before execution.
• Any repayment obligation must be prorated over a defined retention period not exceeding two years and may not accrue interest.
• Repayment is only triggered by early separation occurring solely at the employee’s election or the employee’s termination due to misconduct.
• The employee must also have the option to defer receipt of the payment until completion of the retention period, in which case no repayment obligation applies.

Tuition Repayment Agreements
The statute allows repayment of tuition or credential costs where the agreement is separate from the employment contract and obtaining the credential is not a condition of employment. Repayment must be limited to the employer’s actual cost for the transferable credential, disclosed in advance and prorated over any required service period without acceleration upon separation. Employees must be exempt from repayment if terminated unless the termination is for misconduct.

Approved Apprenticeship Programs
AB 692 does not apply to contracts related to enrollment in apprenticeship programs that are approved by the California Division of Apprenticeship Standards. Employers relying on this exception should confirm that the program is formally approved and administered in compliance with applicable state apprenticeship requirements.

Government Loan Repayment and Forgiveness Programs
The statute also excludes contracts entered into under loan repayment assistance or loan forgiveness programs administered by federal, state or local governmental agencies.

Residential Property Transactions
Finally, AB 692 does not restrict contracts related to the lease, financing or purchase of residential property, including agreements governed by the California Residential Mortgage Lending Act.

Enforcement and Risk Considerations
AB 692 creates a new private right of action allowing workers to bring claims on behalf of themselves and similarly situated individuals for violations of the statute. Available remedies include statutory damages for the greater of the complainant employee’s actual damages or $5,000 per affected worker, as well as injunctive relief and recovery of attorneys’ fees and costs. These remedies apply on a per-employee basis, significantly increasing potential exposure in the event of widespread noncompliance.

Conclusion
AB 692 represents a significant shift in California employment law and will invalidate many commonly used repayment and incentive provisions. Employers should promptly review offer letters, employment agreements, bonus plans and training reimbursement policies to assess compliance and mitigate risk in the new year.

Working with experienced employment counsel can help ensure incentive programs are structured to achieve business goals while complying with California’s evolving legal landscape.