California’s new restrictions on “stay-or-pay” employment contracts limit when employers can require employees to repay training costs, bonuses or other compensation if they leave a job. Below are some frequently asked questions about Assembly Bill 692, which prohibits many repayment obligations tied to continued employment while allowing limited exceptions for certain retention bonuses and educational benefits.
California employers often use training repayment agreements, sign-on bonuses with claw backs or other arrangements designed to encourage employees to remain with the company. Now, California law significantly limits these arrangements.
During a Duckor Metzger & Wynne, APLC, Employment & Labor Law Webinar, shareholders Rose Huelskamp Serrano and Anne K. Wilson took a deep dive into Assembly Bill 692, which introduced these new restrictions on what are commonly known as “stay-or-pay” contracts. These are agreements that require employees to repay certain compensation or expenses if they leave employment before a specified period. The law reflects California’s broader trend toward strengthening employee mobility and limiting financial penalties tied to job changes.
The new law raises a lot of questions for California employers. Below is a practical FAQ to help employers understand more.
Q1. What is a “stay-or-pay” contract?
A stay-or-pay contract is an agreement requiring an employee to remain employed for a certain period or repay money or other compensation provided by the employer.
Examples include agreements requiring repayment of:
- Training costs
- Hiring bonuses
- Immigration or visa expenses
- Liquidated damages tied to early departure
- Replacement or recruitment costs
The new California law broadly defines these obligations as any “penalty, fee, or cost” imposed on a worker if employment ends.
Q2. Does AB 692 apply to existing employment agreements?
The restrictions apply to contracts entered into on or after Jan. 1, 2026.
Existing agreements are not automatically invalidated. However, if an employer amends or renegotiates an existing contract, the new rules may apply.
Q3. Why is California regulating employment agreements like this?
California has long taken a strong stance in favor of employee mobility and freedom to change jobs, most notably through its prohibition on most non-compete agreements under Business and Professions Code section16600.
The Legislature has increasingly scrutinized financial mechanisms that can indirectly limit mobility. Policymakers argue that stay-or-pay provisions can operate as “de facto non-competes” by making it financially difficult for workers to leave employment.
Q4. Are any stay-or-pay arrangements still allowed?
Yes. The law contains several important exceptions, including:
Retention Bonuses
Employers may still offer retention bonuses if all of the following conditions are met:
- The agreement is in a separate written contract
- The employee has at least five business days to consult an attorney
- Any repayment obligation is prorated
- Repayment cannot include interest
- The employee may defer payment until the end of the retention period
- The retention period cannot exceed two years
- Repayment can only be required if the employee voluntarily leaves or is terminated for misconduct
These safeguards are designed to ensure the arrangement functions as a true incentive rather than a penalty.
Tuition Reimbursement for Transferable Credentials
The law also allows repayment obligations tied to certain educational benefits, provided the training leads to a transferable credential.
This exception recognizes that employers sometimes invest in education that benefits the employee beyond the employer’s business.
Q5. Does the stay-or-pay law apply to independent contractors?
No. The statute applies to employees and prospective employees, not independent contractors.
However, California’s strict worker classification laws mean employers should carefully evaluate whether individuals truly qualify as independent contractors.
Q6. What happens if an employer violates the stay-or-pay law?
Employees may bring private lawsuits if an employer uses an unlawful stay-or-pay provision.
Potential remedies include:
- Actual damages
- Statutory damages (potentially thousands of dollars per violation)
- Injunctive relief
- Attorneys’ fees and costs
Given California’s active employment litigation environment — including class actions and representative actions under the Private Attorneys General Act (PAGA) — even small contractual issues can become costly disputes.
Q7. What should employers do now to ensure compliance with the stay-or-pay law?
Here is a checklist for employers to use:
- Review current employment agreements to identify any repayment provisions tied to continued employment.
- Evaluate training repayment policies to determine whether repayment obligations are tied to actual costs and compliant with the new law.
- Reassess sign-on bonuses and retention incentives and consider structuring them to meet the new retention bonus exception.
- Separate retention agreements from general employment contracts.
- Update templates used in recruiting; ensure offer letters and employment contracts do not contain prohibited language.
- Train HR and recruiting teams to ensure they understand the new limitations before negotiating compensation packages.
Don’t Let a Retention Tool Become a Legal Risk
California’s new restrictions on stay-or-pay agreements reflect a broader shift toward protecting employee mobility and limiting financial penalties tied to changing jobs. While employers may still offer certain incentives, the law makes clear that repayment obligations connected to continued employment must be carefully designed to avoid functioning as unlawful penalties.
Employers should be taking a closer look at employment agreements, offer letters, training repayment provisions and retention incentive programs before entering new contracts. Even well-intentioned agreements that have been in place for years may need to be revised to comply with the new requirements.
If you have questions about whether your employment agreements or retention incentives comply with California’s new rules, DMW’s Employment & Labor Law attorneys can help. Contact our team to review your contracts, update your templates and ensure your policies align with the evolving compliance landscape.