If you hired anyone in California this year with a training repayment clause, a sign-on bonus clawback, or a relocation payback agreement, that clause may now be void — and keeping it in your offer letters could cost you at least $5,000 per affected worker plus the other side's attorneys' fees.
That is the practical upshot of Assembly Bill 692, signed October 13, 2025, and effective January 1, 2026. The law adds Section 16608 to the Business and Professions Code and Section 926 to the Labor Code, and it targets the "stay-or-pay" provisions that have become standard in offer letters across industries: training repayment agreement provisions (TRAPs), tuition clawbacks, relocation paybacks, and bonus forfeitures triggered by leaving early. The California Labor Federation estimates that one in twelve workers has been stuck in one of these contracts. If your business hires in California, here is what changed, what narrow exceptions survive, and how to bring your hiring paperwork — and your books — into compliance.
What AB 692 Prohibits
The law bans three categories of contract terms in any employment contract, or in any contract a worker must sign as a condition of employment or a work relationship:
- Repayment-on-departure clauses. Any term requiring the worker to pay the employer, a training provider, or a debt collector for a debt if the work relationship ends.
- Collection triggers. Any term authorizing the employer, training provider, or debt collector to resume or start collection — or end forbearance — on a debt when the relationship ends.
- Departure penalties. Any term imposing a penalty, fee, or cost on the worker because the relationship ended.
Note how broad the framing is. The statute speaks of a "worker," defined as a natural person permitted to work for or on behalf of an employer or business entity, including but not limited to employees and prospective employees. It does not clearly distinguish employees from independent contractors or freelancers, so businesses that use contractor agreements with repayment-style terms should not assume they are outside the law's reach.
Also note the debt-collector language. The classic TRAP pattern — the employer finances mandatory training, books it as a loan to the worker, and sends the balance to collections if the worker quits within a year or two — is exactly what the Legislature aimed at. Industries from nursing residencies to trucking and service franchises have used versions of it. For agreements entered into on or after January 1, 2026, those terms are void and unenforceable.
What did not change: pre-2026 contracts
AB 692 is not retroactive. It applies only to contracts entered into on or after January 1, 2026. Older agreements keep whatever enforceability they had under prior law. But any new hire, rehire, renewal, or amended agreement signed this year must comply — which means the template sitting in your HR folder is the thing to audit, not just individual deals.
The Exceptions: Narrow, Conditional, and Easy to Botch
The law preserves a handful of repayment arrangements, but each comes with strings attached. Treat these as the only safe harbors:
Government loan repayment and forgiveness programs
Repayment assistance or forgiveness provided by a federal, state, or local government agency is excluded entirely. If your workers participate in a public-sector loan program tied to their employment, AB 692 does not touch it.
Tuition for a transferable credential — with five conditions
You may still require repayment of tuition costs for a transferable education credential, but only if every one of these holds:
- The repayment agreement is offered separately from any employment contract.
- The credential is not a condition of employment — it must be genuinely optional upskilling, not a job requirement dressed up as a benefit.
- You specify the repayment amount in advance, capped at your actual cost.
- Repayment is prorated over the required employment period, proportional to time served, with no accelerated payment schedule if the worker separates.
- Repayment is not required if you terminate the worker, unless the termination is for misconduct.
Miss any one of these and the clause falls back into the prohibited bucket. The "condition of employment" test deserves emphasis: mandatory onboarding training, required certifications, and employer-specific courses will almost never qualify as transferable credentials.
State-approved apprenticeship programs
Contracts related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards are exempt. These programs already operate under a separate regulatory framework governing training costs. If you run a registered apprenticeship, your existing repayment structure there survives — but ordinary in-house training relabeled as an "apprenticeship" does not.
Sign-on bonuses — with the strictest conditions of all
Upfront discretionary payments not tied to specific job performance — the classic signing bonus — can still carry repayment terms, but the compliance checklist is long:
- Repayment terms live in an agreement separate from the employment contract.
- The worker is told of the right to consult an attorney and given at least five business days to do so before signing.
- The repayment amount accrues no interest, is prorated over a retention period of no more than two years.
- The worker may elect to defer receipt of the payment until the end of the retention period — in which case there is no repayment obligation at all.
- Repayment is triggered only by voluntary separation or worker misconduct — never by a layoff or ordinary termination.
The deferral election is the trap for the unwary: you must actually offer the new hire the choice of waiting until the retention period ends to receive the money with no strings attached. A bonus agreement without that option fails the exception.
Residential property transactions
Contracts relating to the lease, financing, or purchase of residential real property are excluded. Employer-assisted housing deals keep their repayment terms.
Conspicuously absent: retention bonuses and equity
The statute expressly addresses bonuses paid at the outset of employment but says nothing about retention bonuses granted mid-employment. Employment lawyers widely flag this as an open question — a mid-tenure stay bonus with a clawback has no clear safe harbor. Similarly, the law does not address equity-linked arrangements such as employer loans to exercise stock options or purchase restricted stock. Until courts or the Legislature clarify, treat both as high-risk territory and get counsel before papering them.
The Enforcement Teeth: $5,000 Per Worker, Minimum
AB 692 creates a private right of action. An affected worker — or a worker representative acting on behalf of that worker, others similarly situated, or both — can sue for:
- Injunctive relief blocking enforcement of the void terms,
- The greater of actual damages or $5,000 per affected worker, and
- Reasonable attorneys' fees and costs.
The representative-action structure should get every multi-location operator's attention: one template offer letter with a banned clause, rolled out to dozens of hires since January, multiplies the $5,000 floor across every affected worker, with fee-shifting on top. This is the same pattern that has made California wage-and-hour class exposure so punishing — a paperwork violation that scales with headcount.
What Small Employers Should Do Now
You do not need a law-firm budget to get compliant. Work through this checklist:
1. Audit every hiring document dated January 1, 2026, or later
Pull your offer-letter template, onboarding packet, bonus agreements, tuition reimbursement forms, and relocation agreements. Flag any term that requires repayment, restarts collection, or imposes a fee or penalty when employment ends. Pay special attention to documents you inherited from a franchisor, PEO template library, or an out-of-state attorney who may not have California updates.
2. Fix or remove banned terms — do not just stop enforcing them
A void clause sitting in a signed agreement is still evidence that you required it as a condition of employment, which is itself what the statute prohibits. Replace banned repayment terms with compliant alternatives: genuine optional-credential tuition agreements that meet all five conditions, or sign-on bonus agreements rebuilt around the separate-agreement, five-day-review, proration, deferral-election, and voluntary-separation-only requirements.
3. Brief hiring managers and recruiters
The people making verbal promises ("we'll cover your certification, you just have to stay a year") need to know those promises can no longer be papered as repayment obligations. A verbal stay-or-pay understanding that never makes it into a contract is its own legal mess; make sure the team offers only terms the paperwork can lawfully contain.
4. Separate your training economics from your retention strategy
This is the deeper shift. Many small businesses used TRAP-style clauses as retention insurance on training investments: spend $8,000 certifying a technician, and the repayment clause guaranteed either two years of service or the money back. With that insurance gone, the rational responses are operational, not contractual — stagger training milestones, tie raises (not debts) to completed certifications, shorten the payback window on training spending, and budget for higher early-tenure turnover in roles you used to lock in.
5. Mind the states beyond California
California's law is the strictest in the nation, but it is not emerging in a vacuum. Federal efforts to restrict TRAPs stalled when the FTC withdrew its defense of its noncompete rule in court, pushing the fight to state legislatures — and several states are advancing their own versions. If you hire in multiple states, build your templates to the California standard now rather than maintaining a patchwork you will have to unify later.
The Bookkeeping Side: Training Costs Are Now Sunk Costs
AB 692 has a quiet accounting consequence that matters for your books. Under a TRAP-style arrangement, many employers recorded training outlays as a recoverable advance — effectively a receivable from the worker, forgiven over the retention period. When the repayment right disappears, so does the receivable.
Going forward, California training spend that you cannot claw back should be booked as what it is: a period expense, typically under training and development or employee education, recognized when incurred. Review your chart of accounts for worker-advance or training-receivable balances tied to post-January 2026 agreements and write down any that depended on now-void repayment terms — carrying a receivable you cannot legally collect overstates assets and will not survive an audit or due-diligence review. The same logic applies to sign-on bonuses: if the worker elects the deferral option, you hold no receivable at all, just a future compensation obligation.
Cleaner still, track training spend by cohort — what you spent certifying this year's hires versus what those hires produced — so you can see the true return on training now that the contract no longer guarantees it. That cohort view is also the data you need to decide whether a certification program is worth offering once the lock-in is gone.
Keep Your Hiring Paperwork and Your Books Aligned
As you rework offer letters and bonus agreements for AB 692, make sure your accounting reflects the new reality: training dollars without a repayment right are expenses, not loans. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.
