TRAPped No More? Navigating California's Stay-or-Pay Reform

Seyfarth Synopsis: As swashbuckling trick or treaters are donning their swords, and fearing getting trapped in a Halloween haunted house or corn maze, employers operating in California are navigating the mental maze of deciphering a path to compliance with AB 692. Read on for our summary of the tricks and treats (exceptions) to this new "stay-or-pay" prohibition law, which goes into effect January 1, 2026.

On Halloween, it's not ghosts or witches that are concerning employers operating in California, but rather California's AB 692, which goes into effect January 1, 2026. This is one of many legislative efforts nationwide purporting to protect employees from employers "trapping" (TRAP an acronym for Training Repayment Assistance Programs) them into continued employment by paying for training programs in exchange for the employee remaining employed for a certain period of time. Like the trick or treaters who can convince their parents to visit a few more houses on a Halloween night graced with our California weather, the Golden State's new law goes far beyond other states' efforts. Subject to narrow carveouts for certain "stay-or-pay" agreements, it will void contracts that require employees, upon separation of employment, to pay the employer for benefits the employee received during employment, such as training programs, immigration costs, signing or retention bonuses, relocation costs, and more.

Employers that do business in California are rightly scrambling to review their employment agreements and benefit programs to ensure compliance with the new law by January 1, 2026. Keep reading for our summary of how employers can avoid being spooked by these upcoming restrictions.

Trick or Treat! Which Contracts Are Covered?

Within the scope of the law: Contracts that require employees, upon separation of employment, to pay the employer for any "debt," or benefits afforded to the employee during employment.

Outside the scope of the new law: Two key types of contracts for benefits that many employers currently provide, if specific requirements are met:

1. Tuition assistance payments for a transferable credential, and
2. Any discretionary or unearned monetary payment, including bonuses, that is provided at outset of employment and is not tied to specific job performance.

The law also carves out contracts for loan repayment assistance/forgiveness program by a government agency, State Department of Apprenticeship Standards apprenticeship program enrollment, and residential property leasing or purchase assistance, without specific conditions.

Don't Get A Fright When Exploring The Exceptions

Like a haunted house, the contracts excluded from this law are filled with spooky and specific conditions to gain access.

Employers only get the treat of the tuition exception if the agreement satisfies strict conditions:

1. The repayment agreement must be a standalone contract, separate from the employment agreement.
2. It must provide written advance notice of the repayment amount, and that amount cannot exceed the employer's actual cost for the credential.
3. Obtaining the transferable credit cannot be a condition of employment, and while the law does not specify a retention period for tuition assistance, any repayment obligation must include a prorated schedule for early termination.
4. The agreement cannot require repayment if the employer terminates the employee, except in cases of misconduct.

Similarly, the discretionary/unearned monetary payment or bonuses exception only applies if those payments are made at the outset of employment, not tied to job performance, and are:

1. In a separate agreement from the primary employment contract;
2. Advise the employee of the right, to consult an attorney before signing, and give the employee five days to do so;
3. Prorate (presumably immediately) any repayment obligation for early separation based on the remaining retention period (which is expressly limited to a maximum of two years) and not accrue interest;
4. Provide the employee the option to defer receipt of the payment until the end of the retention period without repayment obligation (this will require some mechanism for them to select deferral and could raise issues under federal employee benefit laws); and
5. Require repayment only if the employee leaves voluntarily or is terminated for misconduct.

The discretionary/unearned monetary payment or bonuses category could include relocation payments, signing bonuses, retention bonuses, stock grants, and more.

Offering relocation benefits after AB 692 could be a trick in and of itself. Relocation assistance, often administered through third-party vendors with capped budgets, is designed to cover upfront costs. Deferring such assistance until after a retention period undermines its purpose entirely, leaving employees to front expenses that the benefit was meant to alleviate. Similarly, retention bonuses, which could also include relocation benefits offered to existing employees, are seen as critical tools for maintaining workforce stability during mergers, layoffs, or transitions, are not even included in the exception. Because AB 692 only permits repayment agreements tied to payments made at the start of employment, it excludes retention strategies deployed mid-employment, leaving employers with fewer lawful options to retain key talent during high-risk periods, making traditional retention tools far less viable.

Additionally, many employers use promissory notes with interest as "repayment agreements" when offering bonuses or other benefits to secure repayment if employees leave before the retention periods. AB 692 outlaws this approach.

Non-Compliance Is No Treat

Like the candy collected after a long night of trick or treating, the damages and penalties for non-compliance with AB 692 can really pile up. The law provides employees with a private right of action and allows recovery of $5,000 per employee or actual damages, whichever is greater, as well as injunctive relief, and recovery of attorneys' fees and costs.

How To Survive The "Stay-or-Pay" Maze

If this makes your head spin, you're not alone. Here are your action items toward compliance:

1. Survey your employee retention and incentive benefits programs. This includes reviewing offer letters, and identifying any benefits that are offered in exchange for an employee's agreement to repay the benefit if the employee leaves within a specified period.
2. Review your tuition assistance programs. For tuition payments, is the payment for a transferable credential? If so, make sure you have a separate contract that fits within the requirements of the exception, outlined above.
3. If you promise or provide signing, retention, or bonus payments at the outset of employment, make sure you comply with the exception requirements, outlined above. If you cannot comply with the exception requirements, or if the payment is not promised or provided at the start of employment, consider other options.
   
   For example, AB 692 is not triggered if you offer the bonus but do not pay it until the end of a retention period. Employers can also consider making pro-rata payments phased to occur at specified times during employment if the employee remains employed, rather than requiring repayment if the employee leaves employment. The Assembly Judiciary committee condoned this practice in its April 18, 2025 analysis.
4. Update all existing contracts to comply with the new requirements. Even though contracts entered into pre-January 1, 2026 will not yet bear these requirements, you do not want your managers, recruiters, or HR team accidentally reusing (or extending) non-compliant contracts into 2026.

It's Spooky Out There

AB 692 builds upon existing state and federal prohibitions on employee non-complete agreements, and addresses what is perceived as an employer "work-around" to California's non-compete prohibition impacting employees' career mobility.

While AB 692 is by far the most comprehensive ban on "stay-or-pay" agreements, other states have taken steps to impose similar limits. For example, Wyoming law limits certain incentive agreements. Unlike California, Wyoming provides a timeframe within which the employee must remain employed before the repayment prohibition applies, and even after that, it is prorated. Indiana, Ohio, Colorado have repayment prohibitions specific to training in the healthcare industry (one of the industries and practices at which AB 692 is targeted). Other states, including New York, have seen similar legislative activity.

This anti-TRAP/"stay-or-pay" trend was bolstered by a now-rescinded 2024 NLRB Memorandum that opined stay-or-pay provisions generally violate Sections 7 and 8 of the NLRA in many of the same ways as non-compete agreements. Unlike other states' legislation, AB 692 appears to exceed the scope of this Memo, which did not exclude retention bonuses offered after the start of employment.

Workplace Solutions

California's AB 692 marks a significant shift in the legal landscape surrounding employee retention and incentive agreements, effectively dismantling many traditional "stay-or-pay" arrangements. While the law aims to promote employee mobility and prevent coercive repayment obligations, it also introduces substantial challenges for employers, particularly those relying on these benefits to attract and retain talent. In complying with the restrictions under this law, employers should rethink how they structure benefits and address any resulting culture shifts. Those who adapt thoughtfully will not only avoid costly penalties but may also have the competitive edge. The authors or your favorite Seyfarth lawyer are here to advise on compliance with these new requirements.

Edited by: Catherine Feldman

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.