California Reshapes 'Stay-or-Pay' Contracts: What Employers Must Do by January 1, 2026

Key Takeaways 

1. Effective January 1, 2026, California employers cannot require workers to repay sign-on, retention, or training bonuses upon employment termination, except in narrowly defined cases, and any contract that violates these restrictions will be void and unenforceable.
2. Repayment terms for sign-on or retention bonuses must be in a separate agreement, offer a five-business-day lawyer review, be prorated for up to two years, and let employees defer payment until the retention period ends.
3. Employers face significant liability for noncompliant agreements, including a private right of action for workers, statutory damages of at least $5,000 per worker, injunctive relief, attorneys’ fees, and potential representative actions under the Private Attorneys General Act (PAGA).

Hiring and onboarding workers is a major expense for employers. Similarly, employers use significant incentives such as sign-on or relocation bonuses to attract and hire key talent. When workers stay for less time than an employer expects, those costs could be wasted. To mitigate losses, many employers have sought to recoup those costs through various agreements seeking repayment when the worker leaves. Beginning January 1, 2026, California’s AB 692 will significantly limit employers’ ability to enter into such agreements and deduct those expenses from workers’ paychecks. Employers should begin reevaluating employment agreements, offer packages, and any repayment requirements now to ensure compliance. Furthermore, employers should consider whether they want to take steps to meet the new law’s narrow exemptions. 

What AB 692 Prohibits and Requires Starting January 1, 2026

AB 692 adds section 16608 to California’s Business and Professions Code to make it unlawful for any employment contract to: (1) require a worker to repay an employer, training provider, or debt collector if employment ends; (2) authorize the initiation or resumption of debt collection if employment ends; or (3) impose any penalty or fee on a worker if employment ends. However, employment agreements for the receipt of a discretionary or unearned monetary payment at the outset of employment that are not tied to specific job performance, such as sign-on or retention bonuses, are permitted, provided the following requirements are met:

1. The terms must be set forth in a separate agreement.
2. The employee must be informed of the right to consult an attorney and given at least five business days to obtain advice from their attorney before signing.
3. If the agreement seeks repayment for a worker’s early separation, the repayment obligation may not accrue interest and must be prorated based on the remaining term, which may not exceed two years from receipt of payment.
4. The worker must have the option to defer receipt of the payment until the end of the fully served retention date with no repayment obligation.
5. Separation before the retention period must be either at the employee’s sole election or by the employer based on the employee’s misconduct.

Penalties Under AB 692

Noncompliant agreements create substantial risk. AB 692 grants workers a private right of action or class claim to recover the greater amount of actual damages sustained by the worker(s) or $5,000 per worker. The law also provides that workers can receive injunctive relief and reasonable attorneys’ fees and costs. Employers may also face representative actions under PAGA, increasing potential exposure and defense costs.

Contracts Excluded From AB 692

The following types of contracts are not subject to AB 692:

• Contracts entered into under any loan repayment assistance or loan forgiveness program provided by a federal, state, or local governmental agency
• Contracts related to the repayment of the cost of tuition for a transferable credential, provided the contract: (1) is offered separately from any employment contract; (2) does not require the credential as a condition of employment; (3) states the repayment amount up front and does not exceed the employer’s cost; (4) provides prorated repayment based on the required employment period, with no accelerated schedule if the worker leaves early; and (5) waives repayment if the worker is terminated, except for misconduct
• Contracts related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards
• Contracts related to the lease, financing, or purchase of residential property, including contracts pursuant to the California Residential Mortgage Lending Act

Practical Next Steps

AB 692 does not apply retroactively. However, any contract entered into on or after January 1, 2026, that fails to comply with the law will be void and unenforceable. Employers should not rely on legacy templates for new hires after the effective date. Instead, employers should conduct a comprehensive review of employment offers and contract arrangements that seek to recoup training or other costs or penalize workers for leaving before a set term. Effective strategies could include: 

1. Preparing a separate agreement setting forth the terms of any repayment obligations related to sign-on bonuses, retention bonuses, training, and other covered costs
2. Carefully restructuring programs to provide the worker with the option to defer receipt until the end of the retention period, such as through the use of deferred payment mechanics, in lieu of post-separation repayments
3. Ensuring that clawback provisions related to sign-on bonuses are rarely used unless they fit a narrow exception
4. Limiting any repayment obligation for early separation to a prorated amount within the two-year cap
5. Informing workers of the ability to have a lawyer review the retention provision, as well as the five-day waiting period

Conclusion

AB 692 signals a clear policy shift away from employee repayment provisions. However, implementation of the law does raise several questions, including how employers should treat relocation benefits—which realistically cannot be deferred or prorated because the worker often needs the upfront costs to move—or what qualifies as a “transferable” credential that is “separate” from an employment contract. By proactively redesigning bonus and retention programs to meet the statute’s specific requirements, employers can continue to attract and retain talent while minimizing litigation risk and preserving enforceability.