What Is a Stay-or-Pay Clause?

A "stay-or-pay" clause is a contract term requiring an employee to repay the employer — or pay a fee — if the employee leaves before a specified date. Common forms include:

• Training repayment agreement provisions (TRAPs) requiring employees to reimburse the cost of employer-sponsored training
• Sign-on bonus clawbacks tied to a minimum tenure
• Exit fees charged simply for resigning
• Replacement hire costs passed on to the departing employee
• Immigration and visa sponsorship cost recovery

These clauses were common in healthcare, tech, and professional services — industries where employers invest heavily in onboarding and specialized training. AB 692 substantially restricts or eliminates them.

What AB 692 Actually Says

AB 692 added Business & Professions Code § 16608 and Labor Code § 926, effective January 1, 2026. The core prohibition:

"An employer shall not require an employee to enter into an agreement that requires the employee to pay the employer, or a third party designated by the employer, for the costs of the employee's recruitment, employment, or training if the employee separates from employment."

Bus. & Prof. Code § 16608(a) — Cited but not quoted verbatim; verify full statutory text before filing

Any such provision is void as against public policy. The law applies to contracts entered, renewed, or amended on or after January 1, 2026. It does not automatically void contracts signed before that date, but employers should not rely on pre-2026 agreements that include these terms if renewed or modified.

The Narrow Exceptions

AB 692 carves out limited exceptions. Each has specific procedural requirements — these are not simply contractual permission slips. The exceptions apply to:

If your training program does not squarely fit one of these categories, the repayment clause is likely void. Courts will not strain to find an exception where one does not clearly apply.

Penalties for Non-Compliance

Under Labor Code § 926 (as added by AB 692), an employer who violates the stay-or-pay ban faces:

• Damages of at least $5,000 per affected employee
• Actual damages if greater
• Attorney fees and costs
• The prohibited clause is void and unenforceable

Importantly, an employer that merely includes a prohibited clause — even if it never tries to enforce it — may be liable. The statute does not require a collection attempt to trigger the penalty.

What Employers Need to Review

Audit the following documents for prohibited language:

1. Offer letters — any clawback of sign-on bonuses tied to tenure
2. Training agreements — any obligation to repay training costs upon separation
3. Immigration agreements — any employer cost-recovery for visa sponsorship
4. Arbitration agreements — sometimes contain repayment clauses buried in recitals
5. Independent contractor agreements — the law may apply depending on classification

What Compliant Agreements Look Like

If you believe your program fits one of the narrow exceptions, the compliant structure requires:

• A separate written agreement — not buried in an offer letter or handbook
• At least five business days for the employee to consult an attorney before signing
• Repayment terms that are prorated — you cannot charge the full amount if the employee completes most of the required period
• The agreement must reference the specific qualifying program

If your current agreement bundles repayment language into a broader offer letter or handbook acknowledgment, it does not satisfy the separate-agreement requirement even if the underlying program might otherwise qualify.

How This Interacts with Existing California Law

AB 692 layers on top of California's already employee-protective framework:

• Business & Professions Code § 16600 — already voids most non-compete agreements. Stay-or-pay clauses that function as de facto non-competes (e.g., "you owe us $50,000 if you leave and work for a competitor") were already suspect under Edwards v. Arthur Andersen (2008) 44 Cal.4th 937.
• Labor Code § 221 — prohibits employers from requiring employees to return wages already earned. Some training repayment clauses tried to characterize wages as advances — courts were skeptical; AB 692 forecloses the argument entirely for covered clauses.
• PAGA — Labor Code § 926 violations may be actionable under PAGA, adding a representative action risk on top of individual claims.

Recommended Employer Action Steps

1. Pull every active offer letter template and training agreement immediately
2. Flag any clause that requires a payment from the employee upon separation — for any reason
3. Evaluate whether the program qualifies for a statutory exception (government loan forgiveness, transferable credential, state apprenticeship)
4. If it qualifies, rebuild the agreement as a standalone document with the required 5-day review period and prorated terms
5. If it does not qualify, remove the clause entirely — do not try to reframe or soften it
6. Brief HR and recruiting on the change — the law reaches clauses presented as a condition of employment even if never ultimately signed
7. For pre-2026 agreements: do not attempt to enforce them without legal review; renewing or amending a contract triggers the new law

This article is provided for general informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by reading this content. Laws change frequently — consult a qualified California employment attorney for advice specific to your situation. McLellan Law Group, LLP  |  20665 4th Street, Ste. 202, Saratoga, CA 95070  |  (408) 963-7533