AB 692: California’s Stay-or-Pay Limits and How Employers Should Prepare
If signed by the Governor, AB 692 would limit “stay-or-pay” and training-repayment clauses in California for contracts entered on or after January 1, 2026. This guide explains what changes, what still works, and how to get your templates ready without losing hiring power.
Why this Matters
AB 692 targets contract terms that penalize employees for leaving a specific employer. These can include quit fees, training-cost paybacks, or other repayments triggered by resignation. The intent is to protect worker mobility while preserving incentives that are structured fairly. The bill is prospective. Existing agreements are not retroactive.
What AB 692 Would Prohibit
AB 692 would bar terms that require payment, repayment, or debt collection because someone ends the relationship with a particular employer. Prohibited examples include:
- Quit fees or other departure penalties
- Replacement-hire or retraining fees
- Repayment of immigration or visa costs
- Liquidated damages tied to leaving
- Claims for lost goodwill or lost profit due to separation
What Still Works with Guardrails
Tuition Reimbursement
You can still sponsor education if you structure it correctly.
- Use a separate agreement
- The credential must be transferable and not required for the current job
- Cap any repayment at the actual employer cost
- Repayment must be pro-rated with no acceleration
- No repayment if you terminate the employee, except for misconduct
Retention Bonuses
You can still use sign-on or retention incentives with payback terms if you follow strict rules.
- Put terms in a separate agreement
- Provide at least five business days to review and consult counsel
- Repayment must be pro-rated and interest-free
- The retention period can be no longer than two years
- Offer an option to defer payout until the end of the period
- Early separation must be the employee’s choice or termination for misconduct
Enforcement and Exposure
AB 692 includes a private right of action. Remedies include actual damages or a $5,000 minimum per employee, whichever is greater, plus attorneys’ fees, costs, and injunctive relief. That creates real litigation risk for noncompliant templates or informal offer addenda.
Timing and Scope
- Status: Passed by the Legislature and pending the Governor’s signature
- Effective date: Contracts entered on or after January 1, 2026, if signed
- Retroactivity: Does not apply to existing agreements
What to do Now
Use the remainder of this year to modernize offers and incentives so you are ready on day one.
1) Inventory and Classify
Gather every template that mentions repayment, clawbacks, bonuses, training, or program costs. Flag any language that conditions payment on resignation or termination.
2) Split the Paperwork
Move tuition reimbursement and retention terms into separate, standalone agreements. Add a short plain-English summary so managers explain the programs consistently.
3) Rework the Mechanics
Convert flat paybacks to pro-rated, interest-free schedules. Add the five business day review window and counsel notice. Set a two-year cap for retention periods. Remove acceleration on tuition repayment and confirm no repayment when you terminate, except for misconduct.
4) Align Related Policies
Tighten confidentiality, trade secret, and return-of-property steps to protect real interests without unlawful quit fees. Update onboarding checklists and ATS automations.
5) Train the Field
Give HR and hiring managers a one-page script. Require a second-person review before any incentive or reimbursement offer is sent.
Do not amend older agreements solely because of AB 692. The bill is prospective. Focus on agreements that will be entered on or after January 1, 2026.
How VertiSource HR Helps
You need clean agreements that stay competitive, comply with the bill’s guardrails, and are easy for managers to use. VertiSource HR delivers an end-to-end update so you can roll into 2026 with confidence.
Our implementation Includes:
- Template audit of offers, addenda, tuition programs, and retention bonuses
- Redline package that separates incentive terms into standalone agreements
- Pro-rated, interest-free schedules with a two-year cap, ready to insert
- Five business day review language and manager instructions
- Onboarding and ATS checklist updates to send the right docs every time
- Manager micro-training and a one-page explainer for fast, consistent execution
Outcome: compliant, practical, and defensible agreements that still attract talent.
Disclaimer: For education only. Not legal or tax advice. Regulations change. Consult your counsel.
