On Oct. 13, 2025, Gov. Gavin Newsom signed Assembly Bill 692 (AB 692), which adds Section 16608 to the Business and Professions Code and Section 926 to the California Labor Code. AB 692 will directly restrict employers’ contractual rights by generally making it unlawful to include terms in employment contracts that require a worker to repay a debt if their employment ends. This bill thus prohibits a wide array of “stay-or-pay” contracts. Likewise, AB 692 also prohibits employers from requiring a worker to execute, as a condition of employment, a contract that obligates them to repay a debt upon separation from employment, subject to limited exceptions. 

The new law applies to agreements entered into on or after Jan. 1, 2026, and all employers in California will be subject to this law regardless of their size. 

What AB 692 Prohibits

AB 692 prohibits the inclusion of terms that require a worker to pay or reimburse an employer, training provider, or debt collector for a debt upon termination of the worker’s employment or other work relationship, subject to specific exceptions. Under AB 692, unlawful contractual provisions impose fees, penalties, costs or any form of repayment obligation on a worker, authorize debt collection, or end forbearance on a debt upon the end of the worker’s employment or work relationship.

AB 692 does not provide a clear definition of contracts that would be subject to these restrictions. Rather, the bill declares that contracts that “restrain a person from engaging in a lawful profession, trade, or business” as void and contrary to public policy.

Therefore, AB 692 could significantly impact employers’ contractual rights to enforce clawback and repayment policies in California. Accordingly, employers should review and revise their template employment, incentive, compensation, and training agreements, practices and policies to ensure compliance with AB 692, especially for any related contracts that will be entered into on or after Jan. 1, 2026. 

Non-Compliance with AB 692

Since AB 692 allows for private rights of action, non-compliant employers could be held liable for actual damages suffered by the worker(s) or minimum damages of $5,000 per affected worker, whichever is greater, in addition to injunctive relief and reasonable attorney’s fees and costs.

Exceptions to AB 692

AB 692 carves out the following exceptions.  

• Approved Apprenticeship Programs
  • Contracts related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards.
• Discretionary or Unearned Monetary Payments, Including Bonuses
  • Contracts for discretionary or unearned payments at the start of employment (e.g., sign-on bonuses) that are not tied to specific job performance are still permitted only if all of thefollowing conditions are met:
    1. Repayment terms are in a separate agreement from the worker’s primary employment contract;
    2. The worker is notified of their right to consult an attorney about the agreement and is provided with at least five (5) business days to obtain advice of counsel;
    3. Any repayment obligation for early separation is not subject to interest accrual and is prorated based on the remaining term of any retention period, which shall not exceed two (2) years from the receipt of payment;
    4. The worker may defer receipt of payment until the end of retention period without any repayment obligation; and
    5. Repayment is only required if separation prior to the retention period was at the worker’s sole discretion or due to the worker’s misconduct.
• Government Loan Repayment Assistance and Forgiveness Plans
  • Contracts entered into under any loan repayment assistance or loan forgiveness program provided by a federal, state, or local governmental agency.
• Property Transactions
  • Contracts relating to the leasing, financing, or purchasing of residential property, including those under the California Residential Mortgage Lending Act.
• Transferable Credential Tuition
  • Contracts related to the repayment of the cost of tuition for a transferable credential are permitted only if the following requirements are met:
    1. Repayment terms are in a separate agreement from any employment contract;
    2. The transferable credential is not a condition of employment;
    3. The repayment amount is specified in the contract, and does not exceed the actual cost of the transferable credential to the employer;
    4. The contract provides for a prorated repayment during any required employment period, with no accelerated repayment schedule upon separation; and
    5. Repayment is not required upon the termination of employment relationship unless the worker is terminated due to their misconduct. 

If you have any questions regarding compliance with AB 692, please contact a Barnes & Thornburg attorney for assistance.