On September 11, 2025, the California legislature approved AB 692, which prohibits many types of “stay-or-pay” agreements in an attempt to protect employee mobility.
Governor Newsom signed the bill, which will add § 16608 to the Business and Professions Code and § 926 to the Labor Code. This new law will make it unlawful to include in any employment contract or require a worker to execute, as a condition of employment, an agreement that includes terms that require him or her to “pay an employer, training provider, or debt collector for a debt if the worker’s employment or work relationship with a specific employer terminates,” with a few exceptions. The law will apply to any contract entered into on or after January 1, 2026.
What Does AB 692 Prohibit?
California employers will be prohibited from requiring a worker to sign, as a condition of employment, a contractual provision that includes specified contract terms, including a term that requires 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 terminates. The prohibitions specifically include debt requirements, such as employment-related costs, education-related costs, or repayment if employment ends.
“Debt” is defined as “money, property, or their equivalent that is due or owing or alleged to be due or owing from a natural person to another person, including, but not limited to, for 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 bill would deem these contracts as agreements that restrain an individual from engaging in a lawful profession, trade, or business, and as void and contrary to public policy, except as provided.
Exceptions
There are two primary exceptions to the general prohibition: (i) the tuition repayment exception and (ii) the upfront discretionary bonus exception.
Tuition Repayment Exception. Agreements concerning the repayment of tuition for a transferable credential are allowed if the agreement:
- Is offered separately from any employment contract;
- Doesn’t require the credential as a condition of the job;
- States specifically the repayment amount prior to the worker agreeing to the contract, and the repayment amount must not exceed employer’s cost;
- Permits a prorated repayment during the required employment period, but there can be no accelerated repayment pursuant to an early exit; and
- Doesn’t require repayment if the worker is terminated, unless for misconduct.
The term “transferable credential” means a degree that is offered by a third-party institution that is accredited and authorized to operate in the state, is not required for a worker’s current employment, and is transferable and useful for employment beyond the worker’s current employer.
Upfront Discretionary Bonus Exception. AB 692 says that upfront discretionary payments not connected to job performance—like a signing bonus or relocation assistance—are allowed if the agreement satisfies the following requirements:
- The repayment terms have to be in a separate agreement from the main employment contract;
- The employee must be told that they have the right to consult an attorney and be given five business days to do so;
- Repayment for early exit must be interest-free, prorated, and tied to a retention period that isn’t more than two years;
- The worker may defer payment until completing the full retention period to avoid repayment; and
- Early separation must be voluntary or because of employee misconduct.
Penalties for Violations
AB 692 creates a private right of action for monetary damages equal to either the worker’s actual losses or $5,000—whichever is greater, injunctive relief, and reasonable attorneys’ fees and legal costs for the employee.
This can include, but isn’t limited to, a retraining fee, replacement fee, quit fee, reimbursement for immigration or visa-related costs, liquidated damages, lost goodwill, and lost profit.
Takeaway
Employers should not be too eager to amend or revoke their existing agreements, despite the fact that they don’t comply with new requirements under AB 692. That’s because AB 692 isn’t retroactive; the bill only applies to agreements entered on or after January 1, 2026.
In the interim, employers that use “stay or pay” agreements should plan to revise their agreements to comply with the law for contracts entered after the first of next year.