Written by

Kari J. BrownLisa Ann Hilario

New California Law Prohibits “Stay-or-Pay” Employment Agreements 

Starting January 1, 2026, a new California law provides additional protections for workers by prohibiting certain types of debt or “stay-or-pay” obligations.  The law targets contracts or contract provisions in which an employee is required to repay a debt, or pay a fee/penalty, if their employment ends (whether by quitting or otherwise).  The law is designed to address what are sometimes called “TRAPs” (training repayment agreement provisions) or “stay-or-pay” contracts.

Prohibition Against Stay-or-Pay Contracts

California Assembly Bill 692 applies to contracts entered on or after January 1, 2026, and makes it unlawful for an employer to require a worker to execute (as a condition of employment) a contract term that includes any of the following if the employment or work relationship terminates:

• a term that requires the worker to pay an employer for a debt upon termination of employment;
• a term that authorizes the employer to initiate collection of a debt (or end forbearance) if the employment relationship ends; or
• a term that imposes any penalty, fee, or cost on the worker upon termination of employment with that employer.

Contracts with those prohibited terms are declared to be contracts in restraint of trade and are deemed void and contrary to public policy.

Contracts entered prior to January 1, 2026 are not subject to the prohibition.  However it’s prudent to review those contracts for risk, especially if they may be amended later.

Exceptions for Certain Types of Agreements

AB 692 includes a number of exceptions if the agreement strictly complies with specific conditions.

1.  Loan Repayment/Forgiveness Programs:  Contracts entered under a federal, state, or local government loan repayment assistance or forgiveness program are excluded.

2.  Tuition/Transferable Credential Costs:  Repayment obligations for tuition for a “transferable credential” may be permissible if certain conditions are met (for example: the credential is not a condition of employment, the contract is separate from an employment contract, repayment is limited to actual cost, prorated, etc.)

3.  Sign-On/Retention Bonuses or Discretionary Payments:  Up-front or discretionary payments may be permissible if they satisfy stringent additional requirements such as:

• the repayment obligation must be in a separate agreement from the main employment contract;
• the worker must be advised of the right to consult an attorney and be given at least five business days to do so before signing;
• any repayment must be prorated (based on remaining retention period) and may not accrue interest; and the retention period may not exceed 2 years;
• the worker may have the option to defer receipt of the payment until the end of the retention period to avoid obligation to repay; and
• repayment may only be triggered if the worker leaves voluntarily or is terminated for misconduct—not where termination is involuntary (through no fault of employee).

Employers using any of these arrangements must ensure the agreements are structured carefully to satisfy all statutory conditions.

Next Steps

We recommend that your organization take the following steps to prepare for AB 692’s January 1, 2026 effective date:

1.  audit existing agreements to identify offer letters, employment agreements and other agreements that condition repayment of a debt if an employee’s employment ends;

2.  revise or remove problematic clauses; and

3.  train HR/legal staff.

Please contact an SMT Employment Attorney if you have questions or need assistance updating your agreements to comply with the new law.

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Spaulding McCullough & Tansil LLP
Employment Law Group