Question: I heard that California recently passed a law that prevents an employer from making an employee’s repayment obligation for certain costs contingent on the employee remaining employed with the employer. Is this true? What does this mean for employers?
Answer: Yes, this is true. Last week, Governor Newsom signed AB 692, which makes it illegal to include in an employment contract a term that requires the employee to repay a debt if the employee’s employment ends. The contracts this new law aims to prevent are often referred to as “stay or pay” or “training repayment agreement provisions.” These provisions typically involve the employer providing some financial benefit to the employee (for example, a signing bonus or paying an employee’s tuition or educational training) on the condition that the employee stay for some specified period of time. If the employment relationship ends before that time, the employee must repay this “debt” to the employer.
California’s lawmakers enacted this law in response to concerns that these types of contracts prevent employees from moving freely from one job to another. The law applies to all employers in California. Subject to certain exemptions, the law will apply to covered contracts entered into on or after January 1, 2026.
Under the new law, employers can no longer:
- Require an employee to pay an employer, training provider, or debt collector for a debt if the employee’s employment with the employer ends;
- Authorize the employer, training provider, or debt collector to resume or initiate collection of a debt if the employee’s employment with the employer ends; or
- Impose any penalty, fee, or cost on an employee if the employee’s employment or work relationship” with the employer ends.
Although the new law is expansive, it will not apply to various situations, including:
- Agreements entered into before January 1, 2026;
- Agreements entered into with independent contractors;
- 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 California 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.
Some good news for employers is that retention bonus agreements are still permissible if the following conditions are met:
- It is not tied to specific job performance;
- The terms of any repayment obligation are set forth in a separate agreement from the primary employment contract;
- The employee is given five business days to review the agreement and is notified that they have the right to consult an attorney;
- The 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 may not exceed two years from the receipt of payment;
- An employee can defer receipt of the payment to the end of a fully served retention period without any repayment obligation; and
- Separation from employment prior to the retention period was by employee choice or the result of employee misconduct.
The law allows for private rights of action, including minimum damages of $5,000 per worker, injunctive relief, and attorneys’ fees and costs. Employers with questions about this new law may contact their labor counsel.