Alston & Bird - Prepare for California's Ban on 'Stay or Pay' Contracts

Our Labor & Employment Group explains how California’s AB 692 will make “stay or pay” employment contract provisions illegal for agreements entered into on or after January 1, 2026.

1. Employers can no longer require workers to repay training costs or pay penalties if they leave a job early
2. Any employment contract with prohibited provisions after the effective date will be void
3. Affected employees can sue for substantial damages and legal costs

California's AB 692 makes “stay or pay” employment contracts entered into on or after January 1, 2026 illegal in California.
 
The law prohibits employers from including provisions in employment contracts that require employees to pay certain penalties, fees, or costs if they leave their job before a set time, with limited exceptions.
 
An extension of the 2024 prohibition on noncompete contracts, stay-or-pay provisions are the latest target for employment contract prohibitions in California. By imposing a penalty or debt as a condition for leaving a job early, stay-or-pay provisions are now also considered an illegal restraint on workers from freely seeking employment.
 
What’s Not Allowed?
Specifically, the law prohibits employment contracts or provisions that require a worker to pay an employer, training provider, or debt collector for a debt or impose any penalty, fee, or cost if the work relationship terminates.
 
The ban applies to the common use of training-repayment assistance programs (TRAP) where an employer pays for work-related training or education on the condition that the employee stay at the job for a minimum amount of time. If the employee leaves early, they must pay back the costs of these programs.
 
AB 692 also prohibits other common stay-or-pay provisions that require an employee to pay a penalty if they leave their job before a certain time.
 
Exceptions
The bill does include exceptions for some common repayment arrangements, such as tuition reimbursements and signing bonuses, within certain parameters.
 
Tuition reimbursement
Under the new law, provisions for tuition reimbursement are still permitted as long as they are:

1. Offered in an agreement separate from the employment contract.
2. The tuition is for a transferable credential and not required for the job
3. The repayment amount is specified in the agreement and only due if the employee leaves voluntarily or is terminated for misconduct.

Signing bonuses
Repayment of a signing or retention bonus is also permitted as long as:

1. The terms of repayment are set forth in a separate agreement.
2. The employee is notified of the right to consult an attorney and provided a reasonable amount of time to do so.
3. Repayment is only required if an employee voluntarily leaves the job or is terminated for misconduct.

Additionally, no interest can be applied to the repayment of a signing bonus and an employee can choose to defer receiving the bonus until the end of the retention period.
 
Enforcement and Penalties
Any employment contracts that contain stay-or-pay provisions will be declared void if entered into on or after January 1, 2026. The law does not apply retroactively.
AB 692 creates a private right of action and carries heavy civil penalties. Under the law, employees subject to these prohibited agreements, or their representatives, can bring a lawsuit against their employer for injunctive relief or recover the greater of $5,000 per employee or actual damages, plus attorneys’ fees and costs.
 
Key Takeaways and Considerations for Employers
Employers in California must be prepared to comply with the law before it takes effect January 1, 2026. Employers should:

1. Review and update existing employment contracts now. While the law does not apply retroactively, employers should ensure any pending contracts are entered into before January 1, 2026 or modified as needed if set to take effect after that date.
2. Prepare new contracts set to be signed after January 1, 2026 that conform with the new law’s criteria.
3. Draft separate agreements for any tuition reimbursements and signing bonuses planned for 2026.