California’s AB 692: Closing the Door on “Stay-or-Pay” Provisions

Effective January 1, 2026, AB 692 marks California’s newest effort to limit employer-imposed restraints on workers by banning repayment obligations tied to separation from employment. The law builds on California’s aggressive pro-mobility statutory framework, particularly recent expansions to Business & Professions Code § 16600, and creates new compliance obligations for employers who use training-repayment agreements, “clawback” provisions, or similar contract structures.

Overview of AB 692

On October 13, 2025, California Governor Gavin Newsom approved Assembly Bill No. 692, which acts to add Section 16608 to the Business and Professions Code and Section 926 to the Labor Code.[1] This new legislation marks another step in California’s rapidly expanding policy framework aimed at protecting employee mobility and curbing employer-imposed restraints, an evolution underscored by recent amendments to Business & Professions Code § 16600.[2] As discussed in our prior analysis, California has already enhanced § 16600 through SB 699 and AB 1076, giving the state’s longstanding prohibition on non-compete and restrictive covenants sharper teeth and creating significant compliance risks for employers.[3] AB 692 fits squarely within this trend, further restricting contractual provisions that burden employees and reinforcing California’s long-standing opposition toward agreements that impede a worker’s freedom to move or change jobs.

Key Prohibitions Under AB 692

AB 692 affects contracts entered on, or after, January 1, 2026. The law prohibits employers from requiring workers to repay debts upon separation from employment, including training costs, relocation expenses, fees, or similar charges. It also bars provisions that impose penalties, fees, or any form of repayment obligation tied to termination, as well as clauses authorizing debt collection based on a worker’s departure.

Notably, the statute defines “workers” to include, but is not limited to, “employees and prospective employees.”[4] Whether the definition deliberately sought to exclude independent contractors may shape how broadly the law is applied in practice.

Applicable Exceptions and Forgivable Loans

Exceptions under the new legislation include government loan assistance/forgiveness plans, tuition costs for transferable educational credential programs, approved apprenticeship programs, discretionary monetary payments/bonuses, and property transactions.

Although forgivable loans are often marketed as the functional equivalent of signing bonuses, they are not the same in substance or structure. A traditional signing bonus is a straightforward compensation payment: it is treated as wages, taxed immediately upon receipt, and does not create an ongoing debtor–creditor relationship. By contrast, a forgivable loan is expressly structured as debt. The worker typically receives upfront funds pursuant to a promissory note, with forgiveness occurring incrementally over time if the worker remains employed. If the worker separates before the end of the forgiveness period, the outstanding balance may become immediately due, sometimes with interest or collection rights attached.

The statute does not expressly address forgivable loans by name, leaving some ambiguity. Whether a particular forgivable loan arrangement qualifies for the exception will likely depend on how it is structured and documented. For example, a program labeled as a “loan” but functionally operating as a discretionary bonus (e.g. without interest, with strict proration, with a two-year or shorter retention period, and with a genuine deferral option) may be argued to fall within the exception. Conversely, arrangements that emphasize debt characteristics require promissory notes, or impose repayment obligations closely tied to separation from employment will likely face heightened scrutiny and potential invalidation under AB 692.

As a result, employers should not assume that existing forgivable loan programs are insulated by the discretionary bonus exception. Careful restructuring or abandoning loan-based incentives altogether in favor of compliant bonus arrangements may be necessary to mitigate risk once AB 692 takes effect.

Civil Violation/Remedies

AB 692 establishes robust remedies and enforcement mechanisms that significantly increase employers’ exposure for noncompliance. The statute authorizes workers and their representatives to bring civil actions against alleged violators. A prevailing plaintiff may recover actual damages or statutory damages of no less than $5,000 per affected worker, injunctive relief and reasonable attorneys’ fees and costs. The statute expressly permits representative actions on behalf of other workers who are “similarly situated,” increasing the likelihood of collective and class-based litigation.

Importantly, AB 692 states that these remedies are cumulative and do not displace existing statutory protections. Workers may simultaneously pursue relief under other applicable laws, including California’s Unfair Competition Law (Business and Professions Code § 17200), Labor Code § 2802, and Article 1.5 of Chapter 2 of Division 3 of the Labor Code (commencing with § 2775). Employees may also attempt to assert claims under existing Business and Professions Code provisions governing unlawful restraints on trade, particularly where repayment obligations operate as a functional deterrent to employee mobility.[5]

Agreements in 2026

AB 692 continues California’s aggressive expansion of worker-protection laws and further restricts the types of contractual provisions employers may impose on workers, particularly those that penalize employees for leaving a job. With California doubling down on employee mobility through amendments to § 16600 and now AB 692, employers should review their employment agreements, training repayment provisions, and separation-related clauses to ensure compliance before January 1, 2026. Employing contracts that potentially violate AB 692 creates potential liabilities for employers and remedies for workers, including recovery of damages and injunctive relief, and attorney’s fees and costs. If you need assistance reviewing your agreements or drafting new agreements to ensure compliance with this legislation, our team is available to help.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses.
Attorney Robert R. Boeche can be reached in the firm’s San Diego office at (619) 696-9500.

[1] Cal. Assemb. B. 692, ch. 703, 2025 Cal. Stat.

[2] Erwin J. Shustak, Shustak Reynolds & Partners, Recent Amendments to California Business and Professions Code 16600: Sharper Teeth for a Potent Statute and a Serious Trap for Unwary Employers, January 10, 2024, https://shufirm.com/recent-amendments-to-california-business-and-professions-code-section-16600-sharper-teeth-for-a-potent-statute-and-a-serious-trap-for-unwary-employers

[5] See, Shustak, Recent Amendments to California Business & Professions Code 16600, supra note 2.