A new California law restricting the use of so-called “stay-or-pay” agreements has raised a number of questions, especially for public sector employers.  Assembly Bill 692 limits employers’ ability to require employees to repay money upon leaving employment. Stay-or-pay agreements are commonly used to require employees to repay costs of training, or new-hire payments such as relocation or sign-on bonuses.

Does it apply to public employers?

The threshold question for public entities is whether AB 692 applies to them at all.  One of the new statutes added by AB 692 is Labor Code section 926, which provides certain remedies and creates avenues for employees to sue if required to sign a prohibited contract.  It is unclear whether this enforcement provision covers public employers, because Labor Code provisions generally must specify when they apply to public entities and this provision does not do so. 

However, the other section created by the bill is Business and Professions Code section 16608.  That section contains the substantive language barring stay-or-pay agreements in “any employment agreement,” subject to certain exceptions.  The section defines covered employers as “any person or entity that employs workers.”  While a court may ultimately decide the issue, this language suggests that the Legislature intended the bill’s restrictions to apply to all employers – even if the additional remedies created in the separate Labor Code section do not apply to governmental employers. 

What does it do?

Assembly Bill 692 prohibits employment agreements entered into after January 1, 2026, that require an employee to pay a sum to an employer or other entity, if the employee does not stay working for a particular employer.  Such provisions are void and unenforceable, similar to non-compete agreements.

The bill is worded very broadly to apply to any agreement requiring repayment upon termination, whether the debt is owed to the employer, a training provider, or a debt collector.

What are the exceptions?

The law includes limited exceptions, although most are unlikely to apply to typical stay-or-pay agreements between employers and employees.  For example, the bill exempts contracts entered into under a loan repayment assistance or loan forgiveness program provided by a federal, state, or local governmental entity.  Also exempted are contracts related to enrollment in a state-approved apprenticeship program, and contracts related to the lease, financing, or purchase of residential property. 

There are also exceptions covering two of the most common expenses for which stay-or-pay agreements are used.  But each exception carries several detailed conditions, which are likely to limit the usefulness of a stay-or-pay agreement for many employers. 

Exception: Sign-On Bonuses and Relocation Payments at the Time of Hire

Assembly Bill 692 allows agreements requiring repayment of a “discretionary or unearned monetary payment, including a financial bonus, at the outset of employment that is not tied to specific job performance,” if all of the following conditions are met:

  • The repayment agreement is separate from the primary employment contract.
  • The employee is notified that they have the right to consult an attorney regarding the agreement and provided with a reasonable time period of not less than five business days to obtain advice of counsel prior to executing the agreement.
  • Any repayment obligation for early separation from employment is prorated over a period of no more than two years, and does not include interest.
  • The employee has an option to defer receipt of the payment to the end of a fully served retention period without any repayment obligation.
  • Repayment is only required if the employee voluntarily leaves or is terminated by the employer for misconduct.

This type of agreement could cover sign-on bonus, or a payment for relocation costs.  Employers that use stay-or-pay agreements for this purpose should review their contracts to ensure they comply with the required conditions.

Exception: Repayment for Costs of Employer-Provided Training

A common use of stay-or-pay agreements is to recover the costs of training provided to employees who leave after the training is complete.  Employers often see this type of agreement as important to protect their investment in training a new employee, so they do not lose the recently trained employee to another employer.  There is an exception in AB 692 for an agreement requiring repayment of the cost of tuition for a “transferable credential.”  However, the conditions required for such a contract will likely render this option undesirable for many employers.

In particular, a “transferable credential” must be a degree offered by an accredited third-party institution, which is not required for the worker’s current employment, and is transferable and useful for employment beyond the worker’s current employer.  This means it cannot apply to in-house training, or training that leads to a certificate that does not qualify as a “degree.”

Also, to qualify for the exception, a contract must meet the following requirements:

  • The contract is offered separately from any contract for employment.
  • The contract does not require obtaining the transferable credential as a condition of employment.
  • The contract specifies the repayment amount before the worker agrees to the contract, and the repayment amount does not exceed the cost to the employer of the transferable credential received by the worker.
  • The repayment obligation is prorated in a manner that is proportional to the total repayment amount and the length of the required employment period, and does not require an accelerated payment schedule if the worker separates from the employment.
  • Repayment is only required if the employee voluntarily leaves or is terminated for misconduct.

Because a “transferable credential” cannot be required for the employee’s employment, it seems unlikely that many employers would choose to take advantage of this exception.  For example, it would not apply to a city or county paying for a new police officer’s POST training, because the certification is required for the position, and arguably the certification is not a “degree.” 

Employers may need to get creative if they have previously relied on stay-or-pay agreements when providing costly training to new employees.  One option that remains available is to reimburse the employee after successful completion of the training program.

Members of PRISM-pooled programs with questions about stay-or-pay agreements may contact PRISM’s Employment Practices Legal Advice Service at 916-850-7400.