Effective Jan. 1, 2026, Assembly Bill 692 (AB 692) will take effect as Section 16608 of the California Business and Professions Code. This new law will prohibit California employers from using “stay or pay” contracts that require a worker to remain employed or to otherwise repay the employer for “debts” upon leaving their employer — except in limited, defined circumstances. The new law applies prospectively and covers only contracts entered into on or after Jan. 1, 2026.
Overview of New Law
AB 692 is codified in the new Business and Professions Code Section 16608, which makes it unlawful for employers to include in an employment contract, or to require as a condition of employment or a work relationship, any provision that:
- Requires a worker to pay an employer, training provider or debt collector a “debt” (including, but not limited to, employment-related costs, education-related costs, or a consumer financial product or service) if the work relationship terminates
- Permits debt collection upon termination of the work relationship
- Imposes any penalty, fee or cost — such as replacement-hire fees, retention fees, replacement fees, quit fees, reimbursement for immigration or visa-related costs, or liquidated damages — if the work relationship terminates
The law broadly defines “worker” as “a natural person who is permitted to work for or on behalf of an employer or business entity, or who is permitted to participate in any other work relationship, job training program, or skills training program,” including “an employee or prospective employee.” Although certain categories (e.g., independent contractors, freelance workers, externs, interns, apprentices or sole proprietors) were removed from draft versions of the bill, the final statutory text does not expressly exclude them.
Contracts Exempt From Ban
Despite its broad prohibition, the law exempts five categories of contracts:
- Loan repayment or loan forgiveness contracts with a federal, state or local governmental agency
- Contracts related to the repayment of tuition costs, subject to certain requirements
- Contracts related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards
- Contracts for the receipt of a discretionary or unearned monetary payment, including a financial bonus, at the outset of employment that is not tied to specific job performance, subject to certain requirements (see below for more information)
- Contracts related to the lease, financing or purchase of residential property
Requirements for Permissible “Sign-On” and Retention Bonus Clawbacks
As noted above, the new law makes an exception for repayment of a “sign-on” or other retention bonus that is a discretionary or unearned monetary payment made “at the outset of employment that is not tied to specific job performance,” provided all of the following conditions are met:
- The repayment agreement must be set forth in a separate agreement from the primary employment contract.
- Employees must be notified of their right to consult an attorney before signing the agreement and must be provided with a reasonable period of not less than five business days to review the agreement.
- Any repayment for early separation from employment is not subject to interest accrual and must be prorated based on the remaining term of any retention period, which cannot exceed two years.
- Employees must be given the option to defer receipt of the payment until the end of a fully served retention period, without any repayment obligation.
- Separation from employment before the completion of the retention period was at the sole election of the employee, or — if at the employer’s election — only for employee “misconduct” (defined in Section 1256 of the Unemployment Insurance Code for purposes of obtaining unemployment benefits).
Enforcement and Penalties
California Labor Code Section 926 is also enacted as part of AB 692, and it provides that a contract or contract terms entered into on or after Jan. 1, 2026, that violates the new law is void as contrary to public policy.
Importantly, the law creates a private right of action for workers or a workers’ representative to bring a civil action on behalf of themselves and/or others similarly situated, in any court of competent jurisdiction. Employers found liable may be required to pay actual damages, or $5,000 per worker, whichever is greater, in addition to injunctive relief and reasonable attorneys’ fees and costs.
The law further clarifies that these remedies are cumulative and do not limit the remedies available to a worker under other existing laws. This includes, without limitation, Cal. Bus. & Prof. Code Section 16600 prohibiting noncompetes, Labor Code Section 2802 regarding reimbursement of necessary business expenses and California’s Unfair Competition Law, Cal. Bus. & Prof. Code § 17200.
What This Means for Employers
Employers should consider taking the following steps to mitigate risks prior to Jan. 1, 2026:
- Conduct a comprehensive review of all employment-related agreements — including offer letters, policies and contracts — to identify any repayment, penalty or fee provisions that may be affected by or run afoul of AB 692.
- Assess existing repayment or retention agreements to determine whether they fall within an applicable exception.
- Update sign-on and retention bonus agreements to ensure any lawful repayment agreements are drafted as stand-alone documents separate from primary employment agreements and that they meet all exemption requirements, including the required attorney-consultation notice and review period.
- Review offboarding procedures and ensure voluntary resignations and separations for misconduct are clearly documented, helping reduce the risk of later claims of constructive discharge or allegations that the resignation was not at the employee’s “sole” election.
AB 692 reflects California’s continued effort to expand worker mobility and limit contractual provisions that deter employees from changing jobs. Employers using any form of repayment or retention agreements should act promptly to ensure compliance before the law takes effect.