AB 692 Stay-or-Pay Ban: What Employers Can and Can't Recover from Departing Employees
General Defense Resources
If your employment contracts include a clause requiring repayment of training costs, relocation expenses, or a sign-on bonus when someone leaves early, AB 692 California stay-or-pay rules now control whether that clause is enforceable.
As of January 1, 2026, most of these provisions are void, but not all of them, and the exceptions that survive are narrower than most summaries suggest. This guide explains what you can still recover, what you can't, and what a non-compliant clause actually costs if an employee sues.
Key Takeaways
AB 692 voids stay-or-pay contract terms signed on or after January 1, 2026, covering debt repayment, debt collection resumption, and separation-triggered fees or penalties.
Only four exceptions survive: discretionary sign-on/relocation payments (prorated, no interest), tuition for a transferable degree, government loan programs, and residential real property contracts.
Most training repayment agreements for internal certifications don't qualify for the tuition exception, since it requires an actual transferable academic credential.
Non-compliant clauses trigger a private right of action: the greater of actual damages or $5,000 per affected worker, plus attorney's fees and injunctive relief.
Deducting a blocked repayment amount from final pay instead of enforcing a void contract clause creates a separate wage and hour violation.
The law is not retroactive. Only contracts entered into, renewed, or amended on or after January 1, 2026 are affected.
What AB 692 Actually Prohibits
AB 692 added two new statutes, Business and Professions Code §16608 and Labor Code §926, that void, as against public policy, any employment contract term entered into on or after January 1, 2026, that:
Requires a worker to pay the employer, a training provider, or a debt collector a "debt" if the employment relationship ends.
Authorizes the employer or a collector to start or resume collecting a debt, or end a collection pause, because employment ended.
Imposes any penalty, fee, or cost tied to separation: replacement-hire fees, retraining fees, quit fees, immigration or visa-cost reimbursement, liquidated damages, or lost profits/goodwill.
The statute defines "debt" broadly on purpose: money, personal property, or their equivalent "regardless of whether the debt is certain, contingent, or incurred voluntarily." "Employer" is defined just as broadly, explicitly reaching parent companies, subsidiaries, affiliates, contractors, and third-party agents, so restructuring the clause through a related entity does not avoid the statute.
The law applies prospectively only: contracts signed before January 1, 2026 aren't automatically voided, but any new agreement, renewal, or amendment after that date carrying prohibited language is unenforceable from the moment it's signed.
The Four Exceptions to Understand
AB 692 includes four principal statutory exceptions of repayment arrangements, each with strict conditions:
Exception | What Survives | The Catch |
|---|---|---|
Discretionary sign-on/relocation payments | Repayment clause tied to an upfront payment made at or near hire | Must be prorated over no more than 2 years, with no interest |
Tuition for a transferable credential | Repayment tied to tuition for an actual degree from an accredited institution | Does not cover internal certifications, safety training, or non-degree programs - the most common training repayment clause in practice |
Government loan repayment/forgiveness programs | Contracts tied to a qualifying federal, state, or local loan program | Must be an actual government-administered program, not an employer-created equivalent |
Residential real property transactions | Contracts for leasing, financing, or purchasing residential property, including those under the CA Residential Mortgage Lending Act | Narrow category, rarely relevant outside relocation-heavy industries |
The gap most employers miss is the tuition exception's actual scope. If your "training repayment agreement" covers a manufacturer certification, a safety course, an internal onboarding program, or any credential that isn't a transferable academic degree, it almost certainly doesn't qualify for this exception at all.
This is one of the most common clause types in healthcare, logistics, and trucking, and it's the one most likely to be non-compliant without anyone realizing it.
What Non-Compliance Actually Costs
A void clause isn't the end of the exposure. AB 692 gives affected workers a private right of action, meaning they don't need an agency to act first. A worker (or a representative on behalf of similarly situated workers) can sue directly and recover:
The greater of actual damages or $5,000 per affected worker
Injunctive relief
Reasonable attorney's fees and costs
That $5,000 statutory floor is what makes even a low-damages claim financially viable for a plaintiff's attorney to bring, and it multiplies fast. Twenty employees who signed a non-compliant training repayment agreement represent $100,000 in statutory exposure before a single dollar of actual damages or legal fees is added. In industries with routine turnover and heavy training investment, that number compounds every hiring cycle you don't fix the template.
If a contract dispute like this has already surfaced, deciding whether to fight it or resolve it early follows the same logic we cover in settling versus fighting employment litigation in California. The strength of your documentation on when the agreement was signed and whether it fits an exception drives that decision more than anything else.
Don't Try to Recover the Money Through Final Pay Instead
Here's a mistake worth flagging: if a stay-or-pay clause is void and you can't collect the debt contractually, deducting the amount from an employee's final paycheck instead is a separate, independent wage-and-hour violation.
California strictly limits what employers can deduct from wages, and unilaterally withholding pay to recover a training cost or relocation expense the employee never agreed (lawfully) to repay creates exactly the kind of final-pay violation that triggers its own penalties, on top of the AB 692 exposure you were trying to avoid.
Watch: Can You Legally Cut Employee Hours or Pay in California? - worth reviewing if your instinct after reading this is to recover a blocked stay-or-pay debt some other way through pay or hours; the answer, in most cases, is no.
Auditing Your Contracts: What to Do
Pull every active template used at onboarding: offer letters, training repayment agreements, relocation agreements, sign-on bonus letters, and any standalone repayment contracts.
Stop using old templates for new hires immediately: every new hire signed under a non-compliant template after January 1, 2026 adds to your exposure.
Classify each flagged clause by type: sign-on/relocation payment, training repayment, tuition, or something else. Each has a different (or no) path to an exception.
Test the tuition exception honestly. If the underlying credential isn't a transferable degree from an accredited institution, the clause doesn't qualify. Don't assume "training" and "tuition" are interchangeable under this statute.
Fix sign-on and relocation clauses to prorate over no more than two years with zero interest, if you want to preserve any repayment right.
Consider whether a forward-looking retention bonus structure may better accomplish your business objective while complying with AB 692. This achieves a similar retention incentive without triggering AB 692.
Document the audit: when each template was reviewed, what changed, and who approved it.
If you're not sure whether a specific clause survives review, our wage and hour defense team reviews exactly this kind of contract language before it becomes a claim.
Conclusion
AB 692 voids most stay-or-pay contract provisions signed on or after January 1, 2026, and preserves only four narrow exceptions: discretionary sign-on payments prorated without interest, tuition tied to an actual transferable degree, government loan programs, and residential real property contracts. The exception employers rely on most often rarely qualifies, since it isn't a transferable academic credential.
The practical standard: if your repayment clause doesn't fit squarely into one of these four categories, it's void, and the private right of action means an employee doesn't need to wait for an agency to enforce it. $5,000 per affected worker is the statutory floor regardless of actual damages.
If your onboarding templates haven't been reviewed since January 1, 2026, DefendMyBiz can audit your repayment clauses against AB 692's actual exceptions. Book a free 15-minute consultation with our employer defense team.
Frequently Asked Questions
Does AB 692 apply to contracts signed before January 1, 2026?
Can I still require repayment of a sign-on bonus if an employee leaves early?
Does the tuition exception cover employer-paid certification or training programs?
What happens if I include a prohibited clause in a new contract anyway?
Does AB 692 apply to public employers?
Disclaimer: The above content is for informational purposes only. This is not legal or tax advice. Laws, IRS guidance, and withholding requirements can change, and outcomes depend on specific facts. You are advised to contact a qualified attorney for any legal advice.
