On October 13, 2025, Governor Newsom signed Assembly Bill (“AB”) 692 into law. For employment contracts entered into on or after January 1, 2026, this new law makes it unlawful for employers to include terms that make employees assume or repay a debt when employment relationships terminate, subject to certain exceptions.
The purpose of the law is to end employer debt training repayment agreement provisions (“TRAPs”) and prohibit “stay-or-pay” contracts that lock employees into jobs by requiring them to repay “debts” to their employers. In the new year, such contracts will be considered unlawful and against public policy under the California Labor Code and California Business and Professions Code. For violations, employees may file civil lawsuits to recover civil penalties equal to the greater of actual losses or $5,000, injunctive relief, reasonable attorneys’ fees and costs.
Prohibited Terms
No longer will employment contracts be permitted to do following:
- require employees to pay employers, training providers, or debt collectors for debts if the employment relationship terminates;
- authorize employers, training providers, or debt collectors to resume or initiate collection of or end forbearance on debts if the employment relationship terminates; and,
- impose any penalties, fees, or costs on employees if the employment relationship terminates.
Contracts Excluded from the Repayment Prohibition
Employers may still require employees to meet contractual obligations for:
- loan repayment assistance programs or loan forgiveness programs provided by federal, state or local governmental agencies;
- tuition for transferable credentials;
- enrollment in apprenticeship programs approved by the Division of Apprenticeship Standards;
- discretionary or unearned monetary payments offered at the outset of employment such as a sign-on bonuses, subject to additional requirements; and,
- leasing, financing, or purchasing residential property.
Special Rules Permitting Repayment of Training Costs
In order to have valid contracts requiring repayment for tuition for transferable credentials, (which 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), the contract must:
- be offered separately from the employment contract;
- not require obtaining the transferable credential as a condition of employment;
- specify the repayment amount before the employee agrees to the contract; and,
- have a repayment amount that does not exceed the cost to the employer of the transferable credential received by the employee.
Additionally, the contract must allow for prorated repayment amounts during any required employment period that is proportional to the total repayment amount and the length of the required employment period and may not require an accelerated payment schedule if the employment relationship terminates.
Special Rules Permitting Repayment of Sign-On Advances
In order for repayment of discretionary payments not tied to job performance (such as sign-on advances and relocation assistance) to be lawful, the contract must:
- be set out in a separate agreement from the primary employment contract;
- notify the employee of the right to consult an attorney regarding the contract and provide a reasonable period of not less than five business days to obtain advice of counsel prior to executing the contract;
- allow for prorated repayment for early separation from employment based on the remaining term of any retention period, which shall not exceed two (2) years from the receipt of payment and not be subject to interest accrual; and
- allow the employee the option of deferring receipt of the payment until the end of a fully served retention period without any repayment obligation.
Additionally, an employee whose employment is terminated may not be required to repay a sign-on bonus unless such termination is for misconduct or at the “sole election of the employee.”
Key Takeaways
The law applies to contracts entered into on or after January 1, 2026, so employers should not modify or revoke existing agreements. However, before the new law takes effect, employers should review their template contracts, prepare separate contracts, as applicable, and update their handbooks consistent with the mandates of AB 692.
SV Employment Law Firm PC can assist with drafting contracts in compliance with AB 692 and can answer questions about how the law may impact your circumstances. If you have any questions, please feel free to contact us.