California Seeks to Ban ‘Stay or Pay’ Employment Clauses

Quick Hits

• California lawmakers recently passed a bill prohibiting contracts that require workers to pay the employer, training provider, or debt collector for certain expenses if the worker’s employment with the employer ends.
• The bill does not apply to tuition repayment requirements and retention bonuses that meet certain conditions.
• If signed by the governor, the bill will take effect on January 1, 2026.

Historically, some employers have offered to pay for employee training, school tuition, or other benefits, on the condition that the employee remain employed for a specified period of time. Under such arrangements, employees who leave the company before the promised period of employment may be contractually obligated to repay the employer’s costs.

Although such agreements are legal in many contexts, some employee advocates have contended that such agreements are unfair, in that employees may perceive that they are restrained from seeking other employment due to the repayment obligation. California’s attorney general issued a legal alert in 2023, criticizing certain “employee-driven debt products.”

Assembly Bill (AB 692) would prevent employers from including some forms of repayment obligations in written or oral employment agreements. Under this bill, employment contracts entered into on or after January 1, 2026, could not lawfully:

• require workers “to pay an employer, training provider, or debt collector for a debt if the worker’s employment” with the employer ends;
• “[a]uthorize[] the employer, training provider, or debt collector to resume or initiate collection” of a debt if the worker’s employment with the employer ends; or
• “[i]mpose[] any penalty, fee, or cost on a worker if the worker’s employment or work relationship” with the employer ends.

Among other prohibited recoveries, the bill would prohibit employers from recovering immigration or visa-related costs.

The bill would not apply to these situations, among other exceptions:

• agreements entered into before January 1, 2026;
• “[a] contract entered into under any loan repayment assistance program or loan forgiveness program provided by a federal, state, or local governmental agency”;
• “[a] contract related to enrollment in an apprenticeship program approved by the [state] Division of Apprenticeship Standards”; or
• tuition repayment for a transferable credential that “is offered separately from any employment contract” and does not require repayment to the employer if the worker is terminated, except if the worker is dismissed for misconduct. In this case, the contract must not require obtaining a transferable credential as a condition of employment. It must specify the repayment amount before the worker agrees to the contract.

A retention bonus is permissible if these conditions are met:

• it “is not tied to specific job performance”;
• “[t]he terms of any repayment obligation are set forth in a separate agreement from the primary employment contract”;
• employees are “notified that they have the right to consult an attorney regarding the agreement” and allowed five business days to obtain legal advice before signing the agreement;
• “[a]ny repayment obligation for early separation from employment is not subject to interest accrual and is prorated based on the remaining term of any retention period, which shall not exceed two years from the receipt of payment”;
• employees can “defer receipt of the payment to the end of a fully served retention period without any repayment obligation”; and
• “[s]eparation from employment prior to the retention period” was by employee choice or the result of employee misconduct.

If enacted, the bill would grant employees the right to sue for violations. It would not apply to independent contractors, freelance workers, interns, or apprentices.

Unintended Consequences?

The bill does not address what specifically constitutes an “employment contract” that would be subject to the restrictions. For example, it does not address employer loans to facilitate stock option exercises, the purchase of restricted stock, or other equity-incentive related agreements. If enacted, employers may want to analyze whether their current grant practices require changes. In addition, the bill does not address the tax impact that removing provisions requiring repayment upon termination may have on loans to employees, which could result in additional taxes on employees. 

As written, the bill could impact an employer’s ability to enforce clawback policies in California, particularly those that go beyond what is legally required under federal law, like the Dodd-Frank Wall Street Reform and Consumer Protection Act. Employers may want to consider evaluating their clawback policies to determine whether they require modification to avoid a potential conflict with the bill’s requirements. 

Next Steps

If AB 692 is enacted, employers that violate it could be subject to monetary damages in the amount of the worker’s actual damages or $5,000, whichever is greater.

Employers in California may wish to prepare new employment contracts that comply with AB 692 to be signed after January 1, 2026.

Ogletree Deakins will continue to monitor developments and will provide updates on the California and Employee Benefits and Executive Compensation blogs as new information becomes available.

Carly E. Grey is a shareholder in Ogletree Deakins’ Washington, D.C., office.

Christopher W. Olmsted is a shareholder in Ogletree Deakins’ San Diego office.

Charles L. Thompson, IV, is a shareholder in Ogletree Deakins’ San Francisco office.

This article was co-authored by Leah J. Shepherd, who is a writer in Ogletree Deakins’ Washington, D.C., office.

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