Imagine accepting a job that requires training. You complete the program, spend a year in the role, then decide to leave for a better opportunity. On your way out the door, your employer hands you a bill — $8,000 for the training you received, due immediately. Under many contracts written before 2026, that bill was enforceable.
California changed that equation on January 1, 2026. Assembly Bill 692, signed by Governor Newsom on October 13, 2025, bans most of these arrangements outright. Workers subject to illegal stay-or-pay clauses can now sue for damages, and the penalty floor is $5,000 per affected employee — on top of attorney fees and costs. This is one of the most significant shifts in California employment law in recent years, and most workers don’t know it exists.
What a “Stay-or-Pay” Agreement Actually Is
“Stay-or-pay” is informal shorthand for a category of contract provisions that require workers to reimburse their employer for some benefit — training, education, relocation costs, or a sign-on bonus — if they leave before a specified date. Employers often frame these as reasonable cost-sharing. In practice, they function as golden handcuffs that trap workers in jobs they want to leave.
Labor law researchers and worker advocates sometimes call these “TRAPs” — training repayment agreement provisions. The name isn’t subtle, and neither is the mechanism: workers who sign them face real financial exposure if they exercise their right to leave. A physical therapist who receives $15,000 in continuing education might be required to repay the full amount if they leave within two years. A warehouse shift supervisor who received a $5,000 relocation package could face the same demand.
California’s existing non-compete law, rooted in Business and Professions Code section 16600, has long made most post-employment restrictions unenforceable in the state. AB 692 extends the same logic to financial restraints. The legislature found that stay-or-pay provisions operate as an unlawful restraint of trade in the same category as non-compete agreements — they restrict where workers can go and on what terms.
What AB 692 Actually Prohibits
The law amends both the Labor Code and the Business and Professions Code. For contracts signed on or after January 1, 2026, employers and service recipients generally cannot include terms that force a worker to repay a debt to the employer when employment ends, allow the employer to resume debt collection after employment ends, or impose monetary penalties because the worker chose to leave.
Any contract term that violates these rules is void as a matter of law. It cannot be enforced in California courts. If an employer tries to collect under an illegal provision, that attempt itself gives the worker a cause of action.
The law applies to agreements with workers broadly defined — not just traditional employees, but also certain independent contractors and workers engaged through service agreements. The coverage is intentionally wide.
The $5,000 Penalty and How Workers Enforce It
Workers who are subject to an illegal stay-or-pay provision — or who have already been required to repay money under one — can file a civil lawsuit in any California court. They can seek injunctive relief to stop enforcement of the illegal clause and recover actual damages. But here’s the provision that makes this law have teeth: if actual damages are less than $5,000 per affected worker, the court awards the $5,000 minimum anyway.
On top of that, prevailing workers recover reasonable attorney fees and costs. This fee-shifting provision matters enormously for enforcement. Workers who have been forced to pay back a few thousand dollars might not otherwise be able to afford litigation. Attorney fee awards change that calculation.
Workers can also bring representative actions on behalf of multiple affected employees. For employers who have been running blanket training repayment programs across a workforce, the exposure compounds quickly. Fifty workers subject to an illegal clause means at least $250,000 in minimum statutory damages before any fee award.
The Narrow Exceptions in AB 692
The law is not absolute. Several categories of repayment agreements remain permissible when structured correctly.
Sign-on bonuses can still include repayment obligations, but only if they meet strict conditions. The agreement must be in a document separate from the employment contract. Before signing, the worker must be told they have the right to consult an attorney and given at least five business days to do so. Repayment amounts cannot accrue interest and must be prorated — the worker owes less the longer they stay. The retention period used for proration cannot exceed two years. The worker must have the option to defer receiving the bonus entirely without any repayment obligation attached. And repayment is only triggered by voluntary resignation or termination for misconduct, not by layoff, restructuring, or any other employer-initiated separation.
Tuition and credential costs can still be subject to repayment under specific conditions. The agreement must be separate from the employment contract. Obtaining the credential cannot be a condition of employment. Repayment is capped at the employer’s actual cost and must be prorated without acceleration upon separation. Workers who are terminated — for any reason other than their own misconduct — are exempt from repayment entirely.
Apprenticeship programs approved by the California Division of Apprenticeship Standards are excluded from the law’s coverage. Government loan programs — federal, state, or local loan repayment assistance or forgiveness programs — are also exempt.
These exceptions come with real conditions. An employer who tries to structure a clawback as a sign-on bonus repayment but skips the separate-document requirement, or omits the five-day attorney consultation period, or fails to prorate the amount, loses the exception and faces the same liability as if no exception existed at all.
AB 692 and California’s Broader Worker Mobility Framework
This law doesn’t exist in a vacuum. California has consistently positioned itself as the state with the strongest worker mobility protections in the country. Business and Professions Code section 16600 has barred non-compete agreements for decades. SB 699, signed in 2023, went further — invalidating out-of-state non-competes that employers attempted to enforce against California workers, even if the contract was signed in another state.
AB 692 is the next logical step. Non-competes tell workers they can’t work for competitors. Stay-or-pay provisions tell workers they can’t afford to leave. The legislature treated them as functionally equivalent restraints on labor mobility and addressed them with equivalent legal force.
The practical implication for workers is straightforward: if you signed a training repayment agreement or any contract with a payback clause before January 1, 2026, check whether it’s covered by the new law. If you’re asked to sign a new contract after that date that includes repayment terms, the agreement has to satisfy the narrow statutory exceptions or it’s void from the start.
What to Do If Your Employer Is Trying to Enforce One of These Clauses
If you’ve left a job and received a demand letter claiming you owe training costs, relocation expenses, or some other debt to a former employer, don’t assume the demand is valid. Depending on when the contract was signed and how the repayment clause was structured, it may be unenforceable under AB 692 or under California’s broader labor code protections.
Document everything: the contract itself, any side agreements, emails about the debt, and any comm unications from debt collectors. Contact an employment attorney before responding, before making any payment, and certainly before signing any settlement agreement. A letter from an employer’s HR department is not a court judgment, and paying under an illegal contract doesn’t make the underlying clause valid.
Frequently Asked Questions
Does AB 692 apply to contracts signed before January 1, 2026?
No. AB 692 is not retroactive. It applies only to contracts entered into on or after January 1, 2026. Training repayment agreements and similar provisions in contracts signed before that date are governed by prior law.
What if I was already forced to pay back training costs under a contract signed after January 1, 2026?
If the repayment clause in your contract doesn’t meet the statute’s requirements, it was void from the beginning. You may be able to recover those payments as actual damages in a civil action, plus the benefit of the $5,000 minimum if your actual damages are lower.
Can my employer still include a repayment clause in a sign-on bonus agreement?
Yes, but only if it meets every condition in the statute: separate document, attorney consultation period, no interest, prorated repayment, two-year maximum, and no clawback for layoff or involuntary termination. Missing any one of these conditions makes the clause void.
I’m an independent contractor, not an employee. Does this law protect me?
AB 692 covers workers broadly, including certain independent contractors. Whether you’re covered depends on how your engagement is structured. An employment attorney can evaluate your specific situation.
What does “prorated” mean in the context of the sign-on bonus exception?
It means your repayment obligation decreases over time. If you received a $6,000 bonus with a two-year retention period and left after one year, you would owe approximately $3,000 — not the full amount. The law prohibits acceleration, so the remaining balance cannot be called due all at once because you resigned.