AB 692 Limits Repayment Clauses in Employment Contracts

Assembly Bill (AB) 692 was enrolled on October 13, 2025. The law adds Section 16608 to the Business and Professions Code and Section 926 to the Labor Code. AB 692 applies to employment contracts entered into on or after January 1, 2026. Existing contracts are not impacted.

AB 692 prohibits employers from requiring any agreement that obligates a worker to repay costs to an employer, training provider, or debt collector if the worker’s employment ends, unless an exception applies. These contracts are considered to restrain a person from engaging in a lawful profession, trade, or business and are contrary to public policy and therefore void.

The law carves out five exceptions. Contracts relating to certain government loan programs, approved apprenticeship programs, and residential property agreements are exempt. Contracts related to tuition and sign-on bonuses are allowed, but only under strict conditions.

Tuition for Transferable Credentials. Contracts requiring the repayment of tuition for a transferable credential may be exempt if the contract meets all of the following requirements:

• it is offered separately from any contract for employment;
• it does not require obtaining the transferable credential as a condition of employment;
• it specifies the repayment amount before the worker agrees to the contract, and the repayment amount does not exceed the cost to the employer of the transferable credential received by the worker;
• it provides for a prorated repayment amount during any required employment period that is proportional to the total repayment amount and the length of the required employment period and does not require an accelerated payment schedule if the worker separates from the employment; and
• it does not require repayment to the employer by the worker if the worker is terminated, except if the worker is terminated for misconduct.

Discretionary Bonuses at Hire. Contracts for discretionary or unearned monetary payments, including a financial bonus, at the outset of employment not tied to specific job performance, are allowed if all the following conditions are met:

• the terms of any repayment obligation are set forth in a separate agreement from the primary employment contract;
• the employee is notified of the right to consult an attorney and provided with not less than five business days to do so;
• the repayment obligation for early separation does not accrue interest accrual and is prorated based on the remaining term of any retention period, which shall not exceed two years from the receipt of payment;
• the employee has an option to defer receipt of the payment to the end of a fully served retention period without any repayment obligation; and
• separation from employment prior to the retention period was at the sole election of the employee, or at the election of the employer for misconduct.

Employees or their representatives may bring legal action on behalf of themselves and others. Employers who violate AB 692 may face civil penalties, including a minimum of $5,000 per worker, injunctive relief, and attorney fees and costs.

To prepare for AB 692  employers do not need to alter existing contracts, as the law only applies prospectively to employment agreements entered into on or after January 1, 2026. For future contracts requiring a repayment obligation, employers should consult with a Payne & Fears LLP attorney to ensure contracts are compliant with AB 692 and fall within the law’s specified exceptions.

If you have questions about AB 692 or its applicability to your future employment agreements, please contact a Payne & Fears LLP attorney.