Authors: Jeremy Mittman and Thea Rogers
It is relatively commonplace for employers to make payments to employees that are subject to repayment in certain circumstances. Many employment contracts require full and immediate repayment of these amounts when an employee separates from the employer. However, California has recently taken a groundbreaking step with the enactment of Assembly Bill 692 (“AB 692”), designed to promote worker mobility by prohibiting most “stay-or-pay” contractual provisions. Beginning January 1, 2026, when AB 692 takes effect and Section 16608 is added to the California Business and Professions Code, California employers’ ability to include debt-repayment clauses in employment contracts—or in any similar oral or written, express or implied agreements—will be significantly restricted.
The California Labor Commissioner’s Office has not yet issued guidance clarifying whether AB 692 extends to certain independent contractors or freelancers. By its text, the law applies to contracts with “workers,” a term that includes—but is not limited to—employees and prospective employees. Although explicit references to freelancers and independent contractors were removed from earlier drafts of AB 692, the final law does not clearly exclude these categories from its reach.
AB 692 will have no retroactive effect. Accordingly, repayment clauses contained in current California employment contracts will continue to be valid and enforceable. The new law’s prohibitions will apply prospectively only, to contracts entered into on or after January 1, 2026.
Expansive Repayment Prohibitions
In terms of what, exactly, AB 692 bans – employers will soon be prohibited from including any provision in a contract with California workers that requires a worker to pay an employer, a training provider or a debt collector for a debt, should the worker’s employment relationship terminate, absent narrowly defined exceptions. The law also will prohibit an employer, training provider or debt collector from initiating or resuming collection of a debt if the worker’s employment terminates, and will also prohibit imposing any penalty, fee or cost on the worker if the worker’s employment terminates.
Examples of a prohibited “penalty, fee or cost” include “a replacement hire fee, retraining fee, replacement fee, quit fee, reimbursement for immigration or visa-related costs, liquidated damages, lost goodwill, and lost profit.” The term “debt” is given equally broad meaning under the law: it includes money due or owed, or allegedly due or owed, for “employment-related costs, education-related costs, or a consumer financial product or service, regardless of whether the debt is certain, contingent, or incurred voluntarily.”
AB 692 applies equally to workers who terminate voluntarily and those who are involuntarily terminated.
