AB 692 Explained: California Limits Stay-or-Pay Employment Contracts

California’s AB 692 took effect for qualifying contracts entered into on or after January 1, 2026. The law targets employment terms that can make workers owe money, trigger debt collection, or face a penalty simply because their work relationship with a particular employer ends.

These provisions are often called “stay-or-pay” clauses or Training Repayment Agreement Provisions, sometimes shortened to TRAPs. AB 692 is significant, but it is not a blanket ban on every tuition agreement, bonus repayment clause, apprenticeship agreement, or repayment obligation.

This guide explains what AB 692 prohibits, the exceptions written into the law, what happens to older agreements, and what workers should do if they receive a repayment demand.

What Does AB 692 Prohibit?

AB 692 added Business and Professions Code section 16608 and Labor Code section 926.

For contracts entered into on or after January 1, 2026, the law generally prohibits covered contract terms that do any of the following when a worker’s employment or work relationship with a specific employer ends:

• Require the worker to pay an employer, training provider, or debt collector for a debt.
• Authorize collection to begin or resume, or end a period of forbearance on a debt.
• Impose a penalty, fee, or cost because the work relationship terminates.

The statute defines “penalty, fee, or cost” broadly and gives examples such as replacement-hire fees, retraining fees, replacement fees, quit fees, reimbursement for certain immigration or visa-related costs, liquidated damages, lost goodwill, and lost profit.

The focus is on the practical effect of the contract, not simply the heading used by the employer.

Who Is Protected by AB 692?

The statute uses the term “worker” broadly. It includes a natural person who is permitted to work for or on behalf of an employer or business entity or participate in another work relationship, job training program, or skills training program. The definition includes employees and prospective employees.

The statute’s definition of a contract is also broad. It includes written or oral, express or implied promises, undertakings, contracts, or agreements.

What Is a Training Repayment Agreement Provision?

A Training Repayment Agreement Provision can require a worker to reimburse claimed training, education, recruiting, onboarding, or similar costs if the worker leaves before a specified period.

Examples of Stay-or-Pay Terms That May Raise Concerns

A covered agreement may be problematic when it requires:

• A fixed “quit fee” for leaving before a stated date.
• Repayment of internal training costs solely because the employee resigns.
• A replacement-hire or retraining fee triggered by separation.
• Liquidated damages tied to leaving the employer.
• Collection of a debt that had been suspended while the worker remained employed.
• Certain immigration or visa-related reimbursement obligations triggered by termination.

Whether a particular term violates the law depends on the contract date, the repayment trigger, the parties involved, and whether an exception applies.

AB 692 Has Important Exceptions

The law contains several express exceptions. Workers should not assume that every repayment term signed in 2026 is automatically void.

Government Loan Repayment or Forgiveness Programs

AB 692 does not apply to a contract entered into under a loan repayment assistance or loan forgiveness program provided by a federal, state, or local government agency.

Tuition for a Transferable Credential

A tuition-repayment agreement for a qualifying transferable credential can be excluded from the prohibition if statutory conditions are satisfied.

Among other requirements:

• The tuition agreement must be separate from the employment contract.
• The credential cannot be required as a condition of employment.
• The repayment amount must be disclosed before the agreement and cannot exceed the employer’s cost.
• Repayment during a required employment period must be prorated.
• The contract cannot require an accelerated payment schedule when employment ends.
• Repayment generally cannot be required if the worker is terminated, except for termination based on misconduct as defined by the statute.

Approved Apprenticeship Programs

Contracts related to enrollment in an apprenticeship program approved by the California Division of Apprenticeship Standards are also excepted.

Certain Discretionary or Unearned Bonuses

AB 692 allows a narrow exception for certain discretionary or unearned monetary payments, including some financial bonuses provided at the outset of employment, when all statutory safeguards are met.

The agreement must be separate from the primary employment contract. The employee must be told about the right to consult an attorney and receive at least five business days to seek legal advice before signing. Any repayment must be prorated, cannot accrue interest, and the retention period cannot exceed two years.

The worker must also have an option to defer receiving the payment until the end of the retention period without a repayment obligation. Early separation must be at the employee’s election or based on employer termination for misconduct.

Certain Residential Property Agreements

The statute also excludes contracts related to the lease, financing, or purchase of residential property, including certain contracts governed by residential mortgage lending law.

Does AB 692 Apply to Agreements Signed Before 2026?

The statute’s express voiding provision applies to contracts entered into on or after January 1, 2026.

An older agreement should therefore not be described as automatically void under AB 692. That does not mean an older stay-or-pay agreement is necessarily enforceable. Other California laws may still affect the agreement, including rules concerning restraints on trade, reimbursement of business expenses, wage deductions, and other contract principles.

What Remedies Does AB 692 Provide?

Labor Code section 926 authorizes a covered worker or worker representative to bring a civil action for prohibited conduct.

A person found liable may owe actual damages or $5,000 per affected worker, whichever is greater, plus injunctive relief and reasonable attorney’s fees and costs.

What If the Employer Tries to Deduct the Amount From a Final Paycheck?

California places restrictions on deductions from wages. Even if an employer claims a repayment obligation exists, deducting the amount directly from final wages can raise separate wage-law questions.

What to Do if You Receive a Repayment or Collection Demand

• Keep the complete agreement and every attachment.
• Save the offer letter, training records, tuition documents, bonus paperwork, invoices, and repayment schedules.
• Preserve emails, texts, and collection notices.
• Identify when the agreement was entered into.
• Ask for an itemized explanation of the amount and the legal basis for collection.
• Do not ignore a court document or formal deadline.
• Avoid making unnecessary admissions about owing the debt before the agreement has been reviewed.
• Seek California employment-law advice promptly if collection, a final-paycheck deduction, or a large repayment demand is involved.