AB 692 allows an employee or applicant who has been subjected to a violation of this law to bring a civil action on behalf of themselves and other employees or applicants.
Employers should take note of a new California law taking effect January 1, 2026, that restricts entering into contracts that require a worker to stay with the employer or pay for certain expenses advanced by or on behalf of the employer.
Assembly Bill 692, passed by the California Legislature on September 11, 2025, and signed into law by Governor Gavin Newsom on October 13, 2025, makes it unlawful for an employer to require an employee or prospective employee to execute, as a condition of employment, a contract that includes any terms that require an employee or prospective employee to pay an employer, training provider or debt collector for a debt if the employee terminates their employment.
In other words, with a few notable exceptions below, employers no longer can require employees who leave or applicants who do not join the company to repay costs paid for by the employer. The new law covers, for example, certain sign-on bonuses, retention bonuses, tuition reimbursement payments, training fees and repayment for immigration, visa or relocation expenses, which some employers require employees and applicants to repay if they do not stay with the company for a certain period or time or ultimately fail to join.
AB 692 applies only to contracts entered into on or after January 1, 2026. As such, any contracts entered into before then that requires repayment may still be lawful and enforced.
Exceptions
AB 692 contains a few exceptions to the general ban on “stay or pay” contracts.
Contracts for Loan Repayments or Loan Forgiveness with Government Agencies
This law does not apply to a contract entered into under any loan repayment assistance program or loan forgiveness program provided by a federal, state or local government agency.
Certain Tuition Reimbursement Contracts
This law also does not apply to contracts related to the repayment of the cost of tuition for a transferable credential provided that certain requirements are met. “Transferable credential” means a degree that is offered by a third-party institution that is accredited and authorized to operate in the state, is not required for a worker’s current employment and is transferable and useful for employment beyond the worker’s current employer.
Contracts to Enroll in an Apprenticeship
Another exception is for contracts related to the enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards.
Certain Sign-On and Retention Bonuses
This law also excludes contracts for the receipt of a discretionary or unearned monetary payment, including a financial bonus, at the outset of employment that is not tied to specific job performance, provided certain conditions are met.
Certain Contracts Related to the Lease, Financing or Purchase of Residential Property
Finally, this law will not apply to contracts related to the lease, financing or purchase of residential property including, but not limited to, a contract pursuant to the California Residential Mortgage Lending Act.
Risk and Remedies
AB 692 allows an employee or applicant who has been subjected to a violation of this law to bring a civil action on behalf of themselves and other employees or applicants. Violations are considered unfair competition. Employers found to have violated this law may be subject to monetary damages in the amount of the employee or applicant’s actual damages or $5,000, whichever is greater. Successful litigants can also recover attorneys’ fees.
However, even if there is an exemption under the new California law, there are restrictions under the Fair Labor Standards Act (FLSA) and other state laws, as discussed below.
FLSA and Other State Laws
For all employees, employers must check the state wage payment and collection law to determine if any money owed may be deducted from the employee’s pay. For instance, some state laws permit certain deductions only if they are authorized by the employee in writing and/or the deduction is for a permissible purpose.
Even if the state wage payment and collection law would permit a deduction from the employee’s pay, if the employee is nonexempt, the deduction generally cannot reduce a nonexempt employee’s pay below the minimum wage, the highest of federal, state or local law.
Employers also should be mindful that repayment policies can affect whether certain bonuses can be excluded from the regular rate of pay when calculating overtime under the FLSA and/or state law. For example, the federal Department of Labor has taken the position that if an employer requires an employee who leaves the company within a certain period of time to repay a sign-on bonus, the bonus is no longer considered “discretionary,” which means it must be included in the employer’s calculation of the employee’s regular rate of pay.
Further, as to exempt employees, under the FLSA, no payback obligation may be deducted from their salary without risking a violation of the salary basis requirement (and therefore exempt status). To the extent that the exempt employee must pay out of pocket, the employer is well advised to consider timing the repayment obligation so that it is not in proximity to the employee’s final pay to help mitigate risks in this area.
At-Will Employment
All states except Montana are at-will states. If an employer imposes a payback obligation based on some date in the future, an employee may be able to claim they have a contract of employment until that date in the future unless the employer makes explicit that the employer retains the right in the agreement to terminate the employee at-will—that is, at any time, with or without cause and with or without prior notice.
What Does This Mean for Employers?
Employers planning to hire in California or provide conditional benefits or bonuses to California employees should take a look at their existing offer letters, contracts and bonus programs to ensure they do not contain provisions that would violate this new law. Employers should work with counsel to review repayment plans and contracts, including bonus programs, to determine if they meet the requirements of applicable laws and to avoid other pitfalls related to repayment programs.
Employers in all states may wish to review their existing documents and practices to ensure that they are not making deductions prohibited by the applicable state wage payment and collection law, in violation of the applicable minimum wage and/or inconsistent with the salary basis requirement under the FLSA.
For More Information
If you have any questions about this Alert and the new California law, please contact Lorraine Ocheltree, Jennifer O'Sullivan, Brittany Ranelli, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.
If you have any questions about payback obligations more generally under the FLSA or state wage payment and collection laws, please contact Jonathan A. Segal, Natalie F. (Hrubos) Bare or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.