ASAP
California Goes After TRAPs and Stay-or-Pay Provisions
The California legislature passed Assembly Bill 692, which restricts employers’ ability to enforce training and retention repayment provisions and other stay-or-pay provisions in employment agreements. The bill, which we expect to be signed by Governor Newsom soon, will be codified under the new Business and Professions Code Section 16608 and Labor Code Section 926. The new law provides that after January 1, 2026, it will be unlawful to include in an employment contract any provision “as a condition of employment” requiring an employee to pay back money for leaving a job prior to a set date unless the agreement meets specific guidelines. Employers will need to review any programs requiring the repayment of educational costs, relocation costs, signing bonuses, and retention incentives to determine whether they meet the strictures of the new laws.
Where Did this Come From?
This legislation follows a larger trend of states addressing training repayment agreement provisions (“TRAPs”) and stay-or-pay provisions via new laws and government litigation. Several U.S. states have recently passed or enacted laws to regulate or restrict such provisions—including Colorado, Pennsylvania, Indiana, and New York—and Nevada recently joined a multistate enforcement action against TRAPs in healthcare. At the federal level, the Consumer Financial Protection Bureau and Federal Trade Commission have investigated employer-driven debt practices, signaling growing scrutiny of TRAPs nationwide.
This is not California’s first foray into TRAP regulation; the state already has anti-TRAP laws in Labor Code Sections 2802 (requiring employers to indemnify employees for necessary expenditures in the discharge of their job duties) and 2802.1 (regarding TRAPs for specific healthcare workers), though the new laws will be the broadest to date.
Who Is Covered?
The new law applies only to employees and prospective employees. Earlier drafts included independent contractors and freelancers, but they were removed from the scope of the bill.
Does this Affect Existing Contracts?
These restrictions are not retroactive, so contracts entered prior to January 1, 2026, are unaffected. Keep in mind that contracts executed before the close of 2025 still need to pass muster under existing California laws such as Business and Professions Code Section 16600 (governing post-termination restrictions on future employment) and Labor Code Sections 2802 (necessary expenditures as part of job) and 2802.1 (required training for certain medical employees).
What Are the Exceptions?
Business and Professions Code Section 16608 will contain several exceptions. First, a repayment provision for a “transferable credential”—a degree offered by a third-party institution that is useful to the employee beyond their current job—may be valid if:
- It is included in a separate contract;
- Obtaining the credential is not a condition of employment;
- The contract specifies the repayment amount, which does not exceed the cost to the employer for the credential;
- The contract provides for a non-accelerating “prorated repayment amount” (so if the repayment amount is $1,000 to be forgiven after one year of employment and the employee leaves after only six months, they would repay only $500); and
- Repayment is not required if the employee is fired unless it is for misconduct.
Second, repayment for a “discretionary or unearned monetary payment” (such as a signing bonus) will be acceptable if:
- It occurs at the outset of employment;
- It is included in a separate contract;
- The employee is notified of their right to consult an attorney and provided at least five business days to do so;
- The repayment is prorated (as above) without interest;
- The retention period is two years or less;
- The employee can defer payment until the end of the retention period to avoid any repayment obligation; and
- Repayment is not required if the employee is fired unless it is for misconduct.
Section 16608 will also contain exceptions for government loan assistance programs, certain approved apprenticeship programs, and contracts relating to leasing, financing, or purchasing residential property.
Given the scope of the restrictions and the limitations on the above exceptions, employers will need to reexamine many traditional bonus structures, equity programs, and long-term incentive plans (that are not preempted by ERISA) to determine whether they comply with the new laws.
What Are the Consequences of Noncompliance?
Noncompliant contracts entered after January 1, 2026, will be treated as unlawful and in violation of Business and Professions Code Section 16600’s prohibition on restraining a person from engaging in a lawful profession. Employees with such contracts will now have a cause of action under the new Labor Code Section 926 and can seek actual damages or a $5,000 penalty, injunctive relief, and attorney’s fees and costs. Employees and employee representatives will also be able to bring these claims on behalf of “other persons similarly situated.”
I Have Other Questions.
Many of the nitty gritty determinations will be determined by case law over the coming years. One of the few certainties, however, is that if an employer intends to use retention repayment programs of any kind, they need to work with employment counsel to ensure their contracts are compliant by the end of the year. All clawback or repayment agreements should be reviewed carefully for compliance with the statute and employers should seek advice regarding their compensation packages, particularly with executives, higher-earning workers, and equity/stock agreements.
