California Legislature Passes Law Banning “Stay-or-Pay” Provisions: How Employers Can Prepare

California continues to lead the United States in worker protection. Recently, the state legislature passed AB 692, adding Section 16608 to the Business and Professions Code and Section 926 to the Labor Code ("new bill"). Under the new regulations, effective January 1, 2026, employers are prohibited from requiring employees to sign clauses mandating expense reimbursement upon early termination, unless statutory exceptions are met.

This means that if the new regulatory requirements are not satisfied, commonly used clauses in employment contracts and offer letters—such as "resignation fees," "training cost reimbursement," and "sign-on/retention bonus repayment"—will be deemed invalid. Employees may file lawsuits regarding this; if the employer loses the case, it must pay each affected employee a minimum of $5,000 in compensation, plus additional attorney fees and litigation costs.

If you or your enterprise require legal support regarding California employment contracts and compliance, please contact our Partner, Fiona Xu, at contact@consultils.com.

Prohibited Scope of New Bill

Under the new bill, starting in 2026, employers are prohibited from including the following provisions in contracts with employees:

• Requiring employees who terminate employment early to pay fees or debts to the employer or a third party (e.g., resignation fees, training costs, sign-on/retention bonuses, goodwill or profit losses);

• Pursuing debt collection or initiating debt recovery through third parties after an employee’s termination;

• Imposing fines on employees due to their termination.

The new bill also specifies several exceptions, and the following five types of post-termination expense reimbursement agreements remain permissible:

• Government loan repayment: Loan repayment assistance or forgiveness provided by federal, state, or local government agencies;

• Tuition reimbursement agreements: Agreements related to transferable qualification certificates, subject to compliance with statutory requirements (see details below);

• Apprenticeship programs: Contracts related to apprenticeship programs approved by the state’s Division of Apprenticeship Standards;

• Housing-related contracts: Contracts involving the rental, financing, or purchase of residential property;

• Sign-on/retention bonus agreements: Monetary incentives independently provided by employers at the start of employment (e.g., sign-on/retention bonuses) that are unrelated to performance, subject to compliance with statutory requirements (see details below).

In practice, tuition reimbursement agreements and sign-on/retention bonus agreements will have the most significant impact on most employers. The detailed compliance requirements for these two types of agreements are as follows.

1. Tuition Reimbursement Agreements

If an employer funds an employee’s acquisition of a transferable qualification certificate and wishes the employee to reimburse the tuition upon early termination, the tuition reimbursement agreement must meet the following requirements:

• A separate tuition reimbursement agreement must be signed by both parties, independent of the employment contract;

• Obtaining the qualification certificate is not a condition for the employee’s employment;

• The reimbursement amount must be clearly specified in the tuition reimbursement agreement before the employee signs it, and shall not exceed the employer’s actual costs;

• Reimbursement must be prorated based on the employee’s length of service—accelerated repayment upon termination is prohibited;

• If the employee is terminated, the employer may not require reimbursement, unless the termination is due to the employee’s misconduct.

2. Sign-on/Retention Bonus Agreements

The new bill permits the continued use of sign-on/retention bonuses, which are common in recruitment, but the conditions are equally stringent:

• A separate sign-on/retention bonus repayment agreement must be signed by both parties, independent of the employment contract;

• The employer must inform the employee of their right to consult an attorney and provide the employee with a consideration period of no less than 5 business days;

• The repayment amount shall not include interest;

• Reimbursement must be prorated based on the employee’s length of service, and the agreed retention period shall not exceed two years;

• The employee has the right to choose to defer receiving the bonus until the end of the retention period to avoid repayment obligations;

• During the retention period, the employer may not arbitrarily terminate the employee unless the employee engages in misconduct.

Special Note on "Misconduct"

Under the framework of the new bill, both tuition reimbursement agreements and sign-on/retention bonus agreements stipulate that if an employee is terminated, the employer may not require reimbursement of related expenses or bonuses—unless the termination is due to the employee’s "misconduct."

The new bill does not define misconduct itself but instead references the provisions of California Code of Regulations, Title 22, §§ 1256-30. Pursuant to this regulation, misconduct must satisfy the following four requirements:

• The employee owes a material obligation to the employer;

• The employee materially breaches that obligation;

• The breach is committed intentionally or with reckless disregard for the obligation;

• The breach harms or is likely to harm the employer’s interests.

The regulation also explicitly excludes the following situations from being considered misconduct:

• Mere inefficiency or poor job performance;

• Failure to meet performance standards due to lack of ability;

• Occasional negligence or general mistakes (however, if the employee has received prior warnings and is capable of performing the job, repeated negligence may be deemed misconduct);

• Good-faith errors in judgment or exercise of discretion;

• Illegal or criminal acts committed by the employee outside the workplace (typically unrelated to their job).

As evident from the above regulations, "misconduct" under the new bill is not a vague concept like "poor job performance" or "termination for any reason" that employers can arbitrarily invoke—it has strict legal standards. In other words, if an employer intends to rely on the "misconduct" exception in a tuition reimbursement or bonus agreement, it must prepare evidence to prove that the employee’s conduct meets the above criteria; otherwise, the repayment clause may be unenforceable.

Corporate Responses and Trends

With the implementation of the new bill, California-based companies need to prepare in advance:

• Review and revise contract templates: Remove high-risk clauses related to post-termination expense reimbursement;

• Optimize tuition reimbursement agreements: Sign separate agreements, include provisions for prorated reimbursement and employee misconduct, and avoid agreement invalidation;

• Optimize sign-on/retention bonus agreements: Sign separate agreements, include provisions for attorney consultation, prorated reimbursement, deferred payment, and employee misconduct, and avoid agreement invalidation;

• Train HR staff and recruiters: Ensure frontline personnel fully understand the new regulations to avoid making illegal or unenforceable commitments during recruitment;

• Carefully assess employment flexibility: When using sign-on or retention bonuses to attract talent, employers must recognize the restrictions these bonuses impose on the at-will employment system.

California’s legislative trend is clear: worker protection continues to be strengthened, and employment costs and risks for employers are rising. To maintain flexibility in competition, companies must adjust their compliance strategies as soon as possible and update contract templates and employment policies in advance.

If you or your enterprise require legal support regarding California employment contracts and compliance, please contact our Partner, Fiona Xu, at contact@consultils.com.

Disclaimer: The materials provided on this website are for general informational purposes only and do not, and are not intended to, constitute legal advice. You should not act or refrain from acting based on any information provided here. Please consult with your own legal counsel regarding your specific situation and legal questions.

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As Partner and Head of Transactions, Fiona advises technology companies in AI, medical devices, and fintech on corporate, compliance, and export control matters. She helps startups scale and supports established enterprises in navigating complex regulations.

Previously, Fiona guided unicorn companies through global expansion and compliance challenges, building legal frameworks from the ground up. She combines legal expertise with business insight to deliver sustainable processes and practical guidance.

Email:  contact@consultils.com | Phone: 626-344-8949