Under AB 692, the violation occurs when a worker is asked to sign a prohibited repayment clause, not when the employer attempts to collect on it.
A California law that took effect on January 1, 2026 has made most employment repayment clauses unenforceable. Assembly Bill 692 added Section 16608 to the Business and Professions Code and Section 926 to the Labor Code, and it treats these provisions the way California has long treated noncompete agreements: as unlawful restraints on a worker’s ability to take a job elsewhere.
These clauses are commonly called stay or pay provisions, or training repayment agreements. They require a worker to reimburse an employer for training costs, relocation expenses, bonuses, or similar amounts when the worker leaves before a set date. Departure carries a price, which discourages movement to better positions.
How Widespread These Agreements Are
The practice is more common than its low profile suggests. A 2020 Cornell National Social Survey found that close to ten percent of American workers reported being covered by a training repayment agreement. A 2022 National Nurses United survey reported that roughly 45% of nurses with one to five years of experience were bound by one, nearly double the rate among nurses with eleven to twenty years of service.
The Student Borrower Protection Center has estimated that the industries relying most heavily on these agreements, principally health care, trucking, and retail, together employ more than one in three private sector workers. The Consumer Financial Protection Bureau examined the practice in a 2023 report on employer-driven debt.
What the Law Prohibits
Section 16608 makes three categories of contract terms unlawful in agreements entered into on or after January 1, 2026. An employer may not include them in an employment contract, and may not require a worker to sign such a contract as a condition of employment.
Repayment Triggered by Separation
A term requiring a worker to pay an employer, a training provider, or a collection agency because the work relationship ended is prohibited. The obligation is covered whether the amount was fixed in advance or left uncertain, and whether or not the worker took it on voluntarily.
Collection and Forbearance Provisions
A term that allows a debt collector to begin or resume collection, or that ends a payment pause, once a worker leaves is also prohibited. Arrangements that stay dormant during employment and activate on departure fall within the ban.
Exit Fees Under Any Name
The law reaches fees charged simply because a worker left. Covered examples include quit fees, retraining fees, charges for hiring a replacement, reimbursement of visa expenses, liquidated damages, and claims for lost profit or goodwill. The label an employer applies does not control whether the term is lawful.
The definitions are deliberately broad. A worker includes job applicants and freelance workers, not only current employees. An employer includes parent companies, subsidiaries, affiliates, contractors, and third-party agents, so a staffing agency or training vendor pursuing repayment faces the same limits as the company that issued the paychecks.
The Exceptions and What They Require
California did not prohibit every repayment arrangement. Five categories remain lawful, though two carry conditions that many agreements fail.
Signing Bonus Repayment
A discretionary payment made at the outset of employment may carry a repayment obligation, but only if every one of the following conditions is met. Failing any single condition removes the exception entirely:
- The repayment terms appear in an agreement separate from the primary employment contract, not inside the offer letter.
- The worker is notified of the right to consult an attorney and given at least five business days to do so before signing.
- The repayment obligation carries no interest and is prorated against the retention period, which cannot exceed two years from receipt of the payment.
- The worker is given the option to defer receiving the payment until the end of a fully served retention period, with no repayment obligation attached.
- Separation was either the worker’s own decision or the employer’s decision based on misconduct.
The deferral condition is the one most frequently overlooked. It requires employers to offer an alternative in which the worker receives the money later and owes nothing under any circumstance. Agreements drafted without that option do not qualify, regardless of how reasonable the remaining terms appear.
How the Conditions Work in Practice
Consider a worker who receives a $12,000 payment in February 2026 under a twenty four month retention period and resigns after eighteen months. If the agreement met every statutory condition, the employer could seek only the unserved portion, six months out of twenty four, or $3,000.
If the agreement failed any condition, the analysis changes entirely. A demand for the full $12,000 is not simply reduced to $3,000. Proration is itself one of the conditions, so a demand for the whole amount signals that the exception was never satisfied and the term is void. Nothing is collectible. The same result follows if the terms sat inside the offer letter, or if the deferral option was never presented.
Tuition for a Transferable Credential
Payment of tuition expenses may still be recovered, but only for a degree from an accredited third party institution that is not required for the worker’s current job and that carries value with other employers. That contract must stand separately from the employment agreement, must specify the reimbursement amount beforehand without exceeding the employer’s actual cost, must prorate repayment and not accelerate it if the worker leaves, and must not require repayment when the employer terminates the worker for reasons other than misconduct.
Internal certifications, proprietary software courses, and training on an employer’s own systems do not meet the definition of a transferable credential. Repayment obligations attached to that kind of training are not protected by this exception.
Other Excluded Arrangements
- Loan repayment and loan forgiveness programs administered by federal, state, or local government agencies.
- Apprenticeship programs approved by the Division of Apprenticeship Standards.
- Contracts for the lease, financing, or purchase of residential property.
Remedies Available to Workers
A prohibited term is void as contrary to public policy, so the obligation is unenforceable and a worker’s signature does not cure the defect.
Labor Code Section 926 supplies the enforcement mechanism. A worker or representative may sue individually or on behalf of others in the same position. Liability is actual damages or $5,000 per worker, whichever is greater, plus injunctive relief and reasonable attorney fees and costs.
The minimum recovery applies regardless of payment. Because repayment clauses are typically drafted once and applied to every hire, a single defective paragraph can generate exposure across an entire workforce. Remedies are cumulative and do not displace other protections, such as the employer’s obligation to reimburse necessary business expenses under Labor Code Section 2802.
Two points follow from the statutory language. Because the prohibition covers terms required as a condition of employment, a worker who declines to sign one should not suffer adverse consequences for that refusal. And an employer that threatens or pursues collection on a void obligation may raise separate retaliation questions under existing Labor Code provisions.
Which Agreements Are Covered
Both new sections apply only to contracts entered into on or after January 1, 2026. Agreements signed before that date are not retroactively void, though they may remain subject to challenge under California’s long standing prohibition on restraints of trade.
An unsettled question is what happens when older language carries forward. Where an employer has a worker sign an amended agreement, renew a contract, or acknowledge a revised handbook during 2026, there is a reasonable argument that a new contract was formed on that later date and the prohibition applies. The statute does not address this, and no court has yet ruled on it. A second open question is whether the law reaches public employers, since Labor Code provisions usually need to specifically say that they apply to public entities and Section 926 does not.
California is not acting alone. New York passed a law in late 2025 addressing employment promissory notes, and Washington restricted repayment options in its noncompetition statute.
Reviewing a Repayment Demand
Workers facing a repayment demand should locate the document containing the obligation and confirm the date it was signed. The next questions are whether the terms appeared in a standalone agreement or inside the offer letter, whether written notice of the right to consult counsel was provided with at least five business days to act on it, whether a deferral option was ever offered, and how the employment ended.
Those answers usually determine whether the clause survives. Paying a demand that rests on a void provision can complicate an otherwise straightforward position, so review before responding is advisable. An employment attorney can evaluate the specific documents and advise on the appropriate response.
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