California’s AB 692: Ban on Repay-or-Stay Agreements

Effective January 1, 2026, CA Bill 692 enacts the nation’s most comprehensive prohibition on “repay or stay” employment contracts.

California Assembly Bill 692, which Governor Gavin Newsom signed into law on October 13, 2025, takes effect January 1, 2026, establishing the nation’s most comprehensive prohibition on employment contracts requiring workers to repay debts, fees, or costs for leaving employment before completing a retention period.

The legislation adds Business and Professions Code Section 16608 and Labor Code Section 926 — fundamentally reshaping how California employers may structure retention incentives, signing bonuses, and training programs.

The Problem: Training Repayment Agreement Provisions (TRAPs)

Training Repayment Agreement Provisions, commonly known as TRAPs, have proliferated across industries in recent years. Research from 2024 shows that 8.7% of workers reported being subject to TRAPs in 2020, up from just 4.1% in 2014—more than doubling in six years. The Student Borrower Protection Center estimates that major employers rely upon TRAPs in segments of the U.S. labor market that collectively employ more than one-third of private-sector workers.

These agreements typically require employees to repay substantial sums—ranging from $5,000 to over $50,000 in some documented cases—if they resign or separate from employment before completing mandatory service periods.

According to advocacy groups and legal scholars, these agreements have trapped workers in positions they wish to leave, functioning as economic noncompetes by creating financial barriers to job mobility. AB 692 directly addresses this problem by prohibiting contracts that require workers to pay employers for debts upon termination, authorize collection or end forbearance when employment terminates, or impose penalties, fees, or costs when workers leave.

What AB 692 Prohibits

The statute broadly defines prohibited “debt” to include training costs, relocation expenses, immigration and visa costs, replacement hire fees, quit fees, liquidated damages provisions, and any other financial obligation imposed as a consequence of employment termination.

This expansive definition reaches beyond training costs to encompass virtually any monetary penalty for leaving employment. The term “employer” includes parent companies, subsidiaries, affiliates, contractors, and third-party agents, preventing circumvention through affiliated entities.

Three Narrow Exceptions

AB 692 permits repayment agreements only under three strictly limited circumstances:

1. Transferable Credentials from Third-Party Institutions

Employers may require repayment for transferable credentials offered by accredited third-party institutions, such as MBA degrees, CPA certifications, or professional licenses. To qualify, the agreement must:

• Be in a standalone contract separate from the primary employment agreement
• Not require the credential as a condition of employment
• Specify the repayment amount upfront (not exceeding the employer’s actual cost)
• Provide for prorated repayment over a maximum two-year retention period with no accelerated payment schedule if the worker leaves early
• Include written notice of the worker’s right to consult counsel with at least five business days to do so
• Waive repayment if the worker is terminated, unless for misconduct

2. Discretionary Signing Bonuses

Employers may require repayment of discretionary signing bonuses, provided the agreement:

• Includes identical procedural protections as transferable credential agreements
• Offers workers the option to defer receipt until the retention period ends to avoid any repayment obligation
• Requires repayment only if separation is at the employee’s sole discretion or due to employee misconduct

3. Government Programs and Apprenticeships

The law exempts government loan programs, registered apprenticeships under the National Apprenticeship Act, and residential property transactions.

Enforcement and Penalties

AB 692 creates substantial liability exposure for employers. Workers may bring individual or representative actions similar to Private Attorneys General Act (PAGA) claims, potentially vindicating the rights of numerous employees through a single lawsuit. Employers found liable face:

• Actual damages or $5,000 per worker, whichever is greater
• Injunctive relief
• Mandatory attorney fees and costs

Given that representative actions can involve multiple employees, systemic violations could expose employers to significant aggregate liability.

Immediate Action Required

California employers must immediately conduct comprehensive audits of all employment agreements, training programs, relocation policies, bonus plans, and incentive arrangements to identify provisions requiring revision or elimination. The statute applies prospectively to contracts entered into, amended, or extended on or after January 1, 2026.

However, pre-existing agreements remain subject to challenge under Business and Professions Code Section 16600 (prohibiting restraints of trade) and Labor Code Section 2802 (requiring employer indemnification for necessary expenditures). This means employers cannot simply rely on “grandfathering” old agreements — they should review all existing agreements for potential vulnerabilities under California’s broader employment law framework.

California Leads National Movement

AB 692 reflects California’s commitment to protecting worker mobility and eliminating artificial barriers in labor markets, positioning the state at the forefront of a national movement restricting stay-or-pay employment practices. Recent state enforcement actions, including a $3.5 million settlement with Hospital Corporation of America over nurse training agreements, demonstrate growing scrutiny of these practices across multiple states.

Contact Us for Guidance

If you have questions regarding AB 692 compliance, consult qualified employment counsel. Gallagher Krich, APC, provides guidance on employment law matters, contract reviews, and compliance strategies to ensure your organization is prepared for these significant changes.