California's Stay-or-Pay Ban Is Here: What Employers Must Remove From Offer Letters in 2026
Published August 2026 | Last updated August 14, 2026 | California Employment Law
Looking for the employee-facing version of this article? See: Your Employer Can't Make You Sign a Stay-or-Pay Clause Anymore: California's New Law, Explained
What Is California's Stay-or-Pay Ban (AB 692)?
Assembly Bill 692 (Stats. 2025, ch. 703) added section 16608 to the Business and Professions Code and section 926 to the Labor Code, effective January 1, 2026. It targets employment-related repayment and exit-fee provisions — commonly called stay-or-pay clauses — that require a worker to pay an employer, a training provider, or a debt collector when the employment or work relationship ends.
This is not merely an analogy to the noncompete rules. Section 16608, subdivision (c) provides that a contract unlawful under subdivision (b) "is a contract restraining a person from engaging in a lawful profession, trade, or business, and is void under Section 16600 only if the contract was entered into on or after January 1, 2026." The Legislature routed these clauses directly into the section 16600 framework. Expect courts to void them with the readiness that framework invites.
What Section 16608 Prohibits: The Clauses to Remove
Section 16608, subdivision (b)(1) provides that "for contracts entered into on or after January 1, 2026, it shall be unlawful to include in any employment contract, or to require a worker to execute as a condition of employment or a work relationship a contract that includes," a contract term that does any of the following:
- Requires a worker to pay the employer, a training provider, or a debt collector a debt if the work relationship ends;
- Authorizes the employer, training provider, or debt collector to resume or initiate collection of, or end forbearance on, a debt if the worker's employment or work relationship terminates; or
- Imposes any penalty, fee, or cost on a worker if the employment or work relationship terminates — a phrase the statute defines to include replacement hire fees, retraining fees, replacement fees, quit fees, immigration or visa cost reimbursement, liquidated damages, lost goodwill, and lost profit. The list is expressly not exclusive. (Bus. & Prof. Code, § 16608, subd. (a)(7).)
"Alleged" and "contingent" do the work: a term that bites only on early departure, and a demand the employer never proves, are both inside the definition. Creative drafting around the label is unlikely to survive review.
An audit should flag training repayment agreement provisions (TRAPs), sign-on and retention bonus clawbacks structured as debt, tuition and certification repayment terms outside the statutory exception, relocation repayment clauses, visa and immigration cost recoupment, and liquidated damages triggered by departure. Two scoping points widen the exercise. "Employer" is defined to include parent companies, subsidiaries, divisions, affiliates, contractors, hiring parties, and third-party agents — so staffing agency, PEO, and vendor paper is in scope. And the prohibition reaches contracts a worker is required to execute "as a condition of employment or a work relationship," not only the employment contract itself.
What Is the Penalty for a Stay-or-Pay Clause in California?
Two provisions void the term. Section 16608, subdivision (c) voids it under section 16600. Labor Code section 926, subdivision (a) provides that a contract or contract term violating section 16608 "is void as contrary to public policy only if entered into on or after January 1, 2026." Section 926 then creates the private right of action: subdivision (b) permits "a worker who has been subjected to the conduct prohibited by subdivision (b) of Section 16608 . . . or a worker representative" to sue "on behalf of that worker, other persons similarly situated, or both."
Two features deserve attention in a board or carrier conversation. The statute says "any person found liable," not "any employer" — so a training provider or a collection agent that participated is independently exposed. And because the statute authorizes representative claims, a template clause is not one exposure. It is that exposure multiplied by every worker who signed it, with a one-way fee award on top. Section 16608, subdivision (d) confirms these remedies are cumulative and do not displace claims under Labor Code sections 2802 or 2775 et seq. or the Unfair Competition Law.
Timing: The Ban Is Prospective. Renewals Are the Exposure.
The ban applies to contracts entered into on or after January 1, 2026, and it is not retroactive. Both operative provisions use the word "only": section 16608, subdivision (c) voids a prohibited term "only if the contract was entered into on or after January 1, 2026," and Labor Code section 926, subdivision (a) is to the same effect. Agreements signed before that date are not prohibited by AB 692.
The exposure is in the ordinary lifecycle of paperwork. Re-executing, renewing, or materially amending an older agreement on or after January 1, 2026 may cause the resulting agreement to be treated as a contract "entered into" after the effective date, and therefore within the ban. The statute does not say this expressly, and no California court has decided the question. It is an inference from the phrase "entered into," and it is the caution the major employment practices are giving. Annual refreshes, promotion paperwork, and amended retention agreements are the moments where a legacy clause can quietly become a post-2026 violation.
That inference is worth taking seriously precisely because pre-2026 agreements can still be worth something. In USS-POSCO Industries v. Case (2016) 244 Cal.App.4th 197, the Court of Appeal enforced a $30,000 prorated training-reimbursement agreement against a departing employee, rejecting challenges under Labor Code section 2802, section 16600, unconscionability, and failure of consideration, because the program was voluntary, the employee had other routes to the same position, and the credential was portable. (See also City of Oakland v. Hassey (2008) 163 Cal.App.4th 1477.) A pre-2026 agreement that was structured the USS-POSCO way may remain enforceable. Re-papering it in 2026 may forfeit that. That is the practical argument for quarantining legacy agreements rather than sweeping them into an annual refresh.
The Narrow Exceptions, and Their Strict Conditions
Section 16608, subdivision (b)(2) sets out five exceptions, and only five: (A) contracts under a federal, state, or local loan repayment assistance or loan forgiveness program; (B) tuition repayment contracts for a "transferable credential"; (C) contracts for enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards; (D) contracts for a discretionary or unearned monetary payment at the outset of employment that is not tied to specific job performance; and (E) contracts for the lease, financing, or purchase of residential property. For most private employers, (B) and (D) are the two that matter.
The most common compliance error: Conflating the condition sets for the tuition exception (subd. (b)(2)(B)) and the signing-bonus exception (subd. (b)(2)(D)). They carry different requirements. Drafting a tuition program to the signing-bonus checklist, or vice versa, produces a program that fails the exception it was built for.
The conditions do not overlap as much as published commentary suggests. Here is the correct comparison:
| Condition | Tuition repayment for a transferable credential (§ 16608, subd. (b)(2)(B)) | Signing bonus / discretionary payment at outset (§ 16608, subd. (b)(2)(D)) |
|---|---|---|
| Separate agreement | Must be offered separately from any contract for employment | Repayment terms must sit in a separate agreement from the primary employment contract |
| Attorney notice & waiting period | Not required | Required: notice of the right to consult an attorney, plus at least five business days before signing |
| Amount limits | Repayment amount stated before you agree; cannot exceed what the credential actually cost your employer | No interest may accrue on the repayment obligation |
| Proration and time cap | Prorated across the required employment period, no accelerated payment schedule on separation; no two-year ceiling | Prorated against a retention period that cannot exceed two years from the date the worker received the payment |
| Deferral option | Not required | Required: worker must be offered the option to defer receipt of the payment until the end of a fully served retention period, with no repayment obligation at all |
| Repayment triggers | Employer cannot require repayment if it terminates the worker, unless the termination was for misconduct; the credential cannot be a condition of employment | Only the worker's own election to leave, or the employer ending employment for misconduct |
Two contrasts are worth internalizing. The tuition exception contains no five-business-day waiting period and no two-year ceiling — importing those requirements into a tuition program is harmless, but assuming a tuition program is safe because it grants five days is not. And the discretionary payment exception contains the deferral option, which is the condition most employers will miss — because it requires offering the worker a version of the deal with no clawback at all. A program that satisfies the substantive test but sits inside the offer letter, or is presented for same-day signature where five days are required, loses the exception entirely.
Employer Compliance Checklist
- Audit every template now: offer letters, retention and sign-on bonus agreements, training, tuition, relocation, and immigration cost provisions.
- Remove or restructure prohibited terms before any new hire, renewal, or amendment is papered in 2026.
- Quarantine legacy agreements. Flag pre-2026 contracts so they are not re-executed or amended without legal review.
- Rebuild permitted programs to the correct condition set. Tuition programs are built to subdivision (b)(2)(B): separate contract, credential not a condition of employment, amount specified in advance and capped at your cost, prorated with no acceleration, no repayment on a termination that is not for misconduct. Signing bonus programs are built to subdivision (b)(2)(D): separate agreement, counsel notice, five business days, no interest, two-year prorated retention cap, deferral option, limited triggers. Do not use one checklist for both.
- Train HR and recruiting. A verbal repayment demand at onboarding can create exposure even if the paperwork is clean.
- Extend the audit past your own paper. Staffing agency, PEO, vendor, and independent contractor agreements are in scope given how broadly "employer" and "worker" are defined.
- Add the deferral option to every signing bonus repayment agreement. It is a required condition of the exception, not a nicety, and it is the one most likely to be omitted.
- Paper the five-business-day window. Date the delivery of the agreement and the date of signature, and keep the counsel-notice language in the file. The condition is provable only if you documented it.
- Review relocation repayment separately. No exception is written for relocation costs, and the residential property exception is aimed at housing transactions, not moving-expense recoupment.
Frequently Asked Questions
The ban is not retroactive, so pre-2026 agreements are not directly prohibited. Their enforceability is a separate question under prior law, where a voluntary, prorated agreement for a portable credential has been upheld ( USS-POSCO Industries v. Case (2016) 244 Cal.App.4th 197), and re-executing, renewing, or materially amending them after January 1, 2026 can bring them within the ban. Treat them as review items, not safe harbors.
Sometimes. Two of the five exceptions reach these programs: government-sponsored loan repayment or forgiveness programs, and tuition repayment agreements for a transferable credential. The tuition exception requires that the contract be offered separately from any employment contract, that the credential not be a condition of employment, that the repayment amount be specified in advance and not exceed your cost, that repayment be prorated with no accelerated schedule on separation, and that no repayment be required if you terminate the worker for anything other than misconduct. It does not contain a five-business-day counsel period or a two-year cap — those belong to the discretionary payment exception. Drafting a tuition program to the wrong condition list is how a compliant-looking program fails.
The term is void, and Labor Code section 926 gives workers a private right of action, individually and for similarly situated workers: actual damages or $5,000 per worker, whichever is greater, plus injunctive relief and attorney's fees. Across a workforce that signed the same template, exposure compounds quickly.
Clawbacks structured as a debt owed upon leaving are squarely within the statute, and the broad definition of debt reaches contingent obligations. An exception exists under subdivision (b)(2)(D) for a discretionary or unearned payment made at the outset of employment that is not tied to specific job performance, but every condition must be met — including the requirement that the worker be offered the option to defer receipt of the payment with no repayment obligation. Note the timing limit: it covers payments made at the outset of employment. A retention bonus paid mid-employment with an exit-triggered clawback does not fit the exception on its face and carries materially higher risk. Review any bonus repayment provision rather than assuming compliance.
The statute is drafted to reach past the employment relationship. A "worker" is "a natural person who is permitted to work for or on behalf of an employer or business entity, or who is permitted to participate in any other work relationship, job training program, or skills training program." "Employer" includes contractors, hiring parties, and third-party agents. The statute separately defines "freelance worker." And the prohibition reaches contracts required "as a condition of employment or a work relationship." Treat contractor, staffing, and freelance agreements containing repayment or exit-fee terms as covered, and review them on the same schedule as employee paper.
A relocation repayment clause triggered by the worker's departure is a debt for employment-related costs and fits the general prohibition in subdivision (b)(1). None of the five exceptions is written for relocation expenses, and the residential property exception in subdivision (b)(2)(E) is aimed at lease, financing, and purchase transactions rather than moving-cost recoupment. Employers that want to recover relocation spend should assume the clawback structure is unavailable for 2026 agreements and price the expense accordingly.
How McLellan Law Group, LLP Can Help
McLellan Law Group, LLP practices California employment law on both the employer and employee side, throughout Saratoga, San Jose, Silicon Valley, Santa Clara County, the greater Bay Area, and all of California. If your offer letters, retention agreements, or training repayment programs need review against the new law, or you are facing a claim under Labor Code section 926, we can tell you where you stand. We offer one complimentary initial consultation at (650) 383-1266.
For the employee-facing version of this guide, see: Your Employer Can't Make You Sign a Stay-or-Pay Clause Anymore: California's New Law, Explained.
Questions About AB 692 Compliance?
If your offer letters, retention agreements, or training programs need review — or you are facing a claim under the new law — contact McLellan Law Group, LLP for a complimentary initial consultation.
Request a Free ConsultationAttorney advertisement by McLellan Law Group, LLP. This is general information only and not legal advice. Prior results do not guarantee a similar outcome. Reading this article or contacting the firm does not create an attorney-client relationship. Responsible attorney: Claire Melehani, Esq. 20665 4th Street, Ste. 202, Saratoga, CA 95070.
