For years, many California employers included contracts that required departing workers to repay costs, such as the cost of a training course, a relocation package, or a signing bonus. California AB 692 changes that. The law took effect on January 1, 2026, and it applies broadly to agreements that make an employee’s departure trigger repayment obligations.
If your business contracts contain a clause like that, you need to know two things. It probably has little legal force now, and keeping it in a new agreement can create real exposure. Employers need to understand what the law bans, the narrow exceptions it leaves open, how it applies to your existing contracts, and the questions business owners most often ask.
What AB 692 Bans: “Stay-or-Pay” and Training Repayment Clauses
A stay-or-pay clause is any contract term that makes a worker pay the employer money if they leave before a set date. AB 692 adds Section 16608 to the California Business and Professions Code and Section 926 to the Labor Code (the bill text is public at leginfo.legislature.ca.gov), and together they target this entire category.
AB 692 generally voids clauses that require repayment triggered by an employee’s departure, regardless of how they are labeled. That covers a long list of items the law names directly:
- Training and education costs: Tuition, course fees, or the cost of a training repayment agreement (TRA), which requires a worker to repay training costs if they quit within a set period.
- Relocation and onboarding: Money paid to move a worker, plus background-check and onboarding charges.
- Immigration and visa fees: Costs connected to work authorization.
- Replacement and penalty charges: Replacement-hire fees, retraining fees, quit fees, liquidated damages (a preset sum one side owes for breaking a contract), lost goodwill, and lost profit.
So relabeling a quit fee as “liquidated damages” or “lost profit” will not rescue it.
Why the Law Treats These Clauses as Void
California has long held that contracts restraining someone from practicing their trade are void under Business and Professions Code Section 16600, the same provision that kills most non-compete agreements. AB 692 places stay-or-pay terms in that family. The legislature declared them void and contrary to public policy (meaning a court will not enforce them as a matter of state policy) for contracts signed on or after January 1, 2026.
In practical terms, the statute blocks three moves. An employer generally cannot demand repayment triggered by an employee’s departure, start or resume collection efforts or end a pause on collection once the worker leaves, or impose a fee or penalty triggered by the separation itself.
The prohibition extends to third parties, including training providers and debt collectors, so the restriction cannot be sidestepped by routing repayment through an outside school or loan servicer. How courts handle specific arrangements will develop over time.
The Limited Exceptions
Two narrow exceptions apply, each subject to strict statutory conditions:
- Transferable credential: Repayment may survive if the credential is a degree from an accredited third-party institution, the job does not require it, and it holds value for work beyond the current employer. In-house training and non-degree certificates do not qualify.
- Discretionary payment (such as a sign-on bonus): Repayment may attach to an unearned bonus only if the agreement sits separate from the main contract, gives the worker at least five business days to consult an attorney, runs prorated over no more than two years with no interest, offers a deferral option that lets the worker owe nothing, and triggers only on a voluntary departure or a firing for misconduct.
Beyond these two, the law carves out approved apprenticeship programs, government loan forgiveness programs, and residential property transactions.
How AB 692 Applies to Your Contracts
The law is not retroactive and applies only to agreements entered into on or after January 1, 2026.
Older agreements may still be challenged under other legal theories. A pre-2026 TRA clause can face challenges under other theories, such as a claim that it reduced wages below the minimum wage or that the provision is unconscionable. Renewing, amending, or extending an older contract after the effective date may be treated as a new agreement and could bring it within the scope of the ban, though that question remains untested.
For new agreements, the practical screen is simple. Clauses that convert resignation into a repayment obligation are generally high-risk and should be avoided under the statute.
Read More: How to Avoid Legal Issues with Your Employees
The Risk of Keeping a Prohibited Clause
AB 692 created a private right of action, so an employee can sue over a prohibited clause. Employers may face injunctive relief, the greater of actual damages or $5,000 per worker, and reasonable attorneys’ fees; these remedies stack with other rights, such as the Labor Commissioner’s wage-enforcement authority. Even attempting to enforce or collect on a void provision may expose an employer to liability. The cost of relying on an old clause can land well above whatever it was meant to recover.
Common Questions About AB 692
What costs can workers no longer be required to repay?
Most costs tied to separation are off the table. That includes training, education, relocation, onboarding, and immigration or visa expenses, plus penalty-style charges such as lost profit or lost goodwill. Certain sign-on bonuses may be subject to restriction if structured as repayment tied to separation, subject to statutory exceptions.
Does AB 692 affect tuition reimbursement programs?
Yes, for most of them. A tuition repayment obligation triggered by a worker leaving is restricted. The one route that may survive is the transferable-credential exception, which applies only to an accredited third-party degree that the job does not require, and even then, repayment must be prorated with no interest.
What happens if the employer terminates the worker?
Workers generally cannot be required to repay costs when their employment ends, including when the employer initiates the separation. The one exception is a qualifying discretionary payment, in which repayment may attach if the worker resigns voluntarily or is fired for misconduct. Pursuing repayment outside that narrow setting risks a violation.
Read More: How to Legally Let Employees Go
How Nick Heimlich Law Can Help
Questions about a clause like this tend to surface only once a dispute starts, and that is where our firm works. When a former employee challenges a repayment demand, or a business has to answer a claim that a contract term is void, the matter turns on contract enforceability: what the agreement says, when it was signed, and how the statute applies.
Nick Heimlich Law represents businesses in disputes over contract provisions like these, including contested stay-or-pay and liquidated damages terms. We review the agreement, assess its standing under current California law, and advocate for the client in negotiations or business litigation. Consultations run at $450+ per hour with a one-hour minimum, and we serve clients in San Jose and across the Bay Area.
Accurately assessing a clause’s enforceability at the outset can shape an entire dispute. If a contract provision has already become the center of a disagreement, contact Nick Heimlich Law for experienced representation.
