Beginning on January 1, 2026, California employers are subject to sweeping new limits on the repayment obligations they can impose on workers. Assembly Bill 692 restricts so-called “stay-or-pay” provisions that require employees to repay money if they leave employment before a specified period.
The new law reflects California’s continued emphasis on worker mobility and presents significant compliance challenges for employers that have long relied on training reimbursement, sign-on bonuses, retention incentives, and similar benefits.
At its core, AB 692 prohibits employers from entering into agreements that require a worker to repay costs or fees triggered by the end of their employment. Covered obligations may include training expenses, relocation costs, bonuses, and other financial benefits, even when repayment is characterized as reimbursement rather than a penalty. The prohibition applies to agreements entered into on or after January 1, 2026, and extends to debts owed not only to employers, but also to third parties, such as training providers or collection agencies.
What Changed?
Employers have historically used repayment provisions to protect investments in employee development and encourage retention. AB 692 alters that framework by declaring most separation-triggered repayment terms unlawful unless they fall within narrowly-defined exceptions.
One permits repayment of tuition costs for transferable educational credentials, but only when the credential is not required for the job and the agreement is fully separate from the employment contract. Repayment must be prorated over time, capped at actual costs, and eliminated entirely if the worker is involuntarily terminated without misconduct. Despite these strict limits, the statute doesn’t define terms like “misconduct,” so it is unclear what type of behavior would entitle an employer to seek repayment. These restrictions may lead some employers to reconsider offering educational assistance programs altogether.
Another exception applies to certain sign-on and retention bonuses, but only if employers comply with strict procedural safeguards. Workers must receive a standalone repayment agreement, written notice of their right to consult an attorney, and at least five business days to do so. Repayment must be prorated, interest-free, and limited to voluntary separation or misconduct. Employees also must be given the option to defer receipt of the bonus until after the retention period to avoid any repayment obligation. The deferral option and proration requirement fundamentally undermine the intended incentives underlying these types of agreements and may reshape employers’ retention strategies.
Open Questions
AB 692 leaves critical issues unresolved. One of the most consequential is the statute’s definition of “worker.” The law uses expansive language that may extend beyond traditional employees, but it does not clearly address whether independent contractors, interns, or other nontraditional workers are covered. That ambiguity creates uncertainty for employers operating with mixed workforces.
It also is unclear how the law may affect remote workers outside of California, given that these new requirements were created as part of California’s non-compete law (Business & Professions Code Section 16600 et seq.). Amendments to the non-compete law in 2024 clarified that California employers cannot enforce agreements in violation of the non-compete law, regardless of the location of the employee – although the reach of this law is currently being litigated.
Finally, questions remain as to whether a post-2026 amendment to an existing agreement converts it into a new, covered contract and likely to be tested through litigation.
Bonuses and Equity
AB 692 also raises concerns for employers with incentive compensation and equity-based programs. Many bonus plans, stock awards, and equity grants include vesting schedules or forfeiture provisions tied to continued service. Although these arrangements traditionally have not been treated as repayment obligations, the statute’s broad prohibition on penalties or costs triggered by separation raises questions about whether certain forfeiture provisions could be challenged as functional equivalents of prohibited repayment terms.
Equity compensation may be particularly vulnerable. Repurchase rights, clawbacks, and post-termination conditions that impose financial consequences on departing workers could draw scrutiny if they are viewed as discouraging employee mobility.
Enforcement Risks
The law provides a private right of action under the Labor Code, allowing workers to seek injunctive relief, statutory damages of at least $5,000 per worker, recovery of attorneys’ fees and costs, and a potential for civil penalties under the Private Attorneys’ General Act (“PAGA”), in addition to remedies under the non-compete law.
Even agreements that appear to fall within a statutory exception may expose employers to liability if procedural requirements are not met. Compliance will require both substantive redesign and careful attention to timing, disclosures, and documentation.
Now that 2026 is here, employers should review agreement templates, reassess training and incentive programs, and ensure HR professionals understand the law’s constraints. In some cases, employers may need to rethink retention strategies altogether, shifting away from repayment-based mechanisms in favor of incentives that reward longevity without tying benefits to separation.
AB 692 underscores California’s continued effort to eliminate contractual barriers to job mobility. Until courts clarify its boundaries, employers will need to navigate a changing legal landscape where familiar tools now carry heightened risk.