California employers are facing a mandatory "TRAP Reset"—most stay-or-pay contracts signed in California on or after January 1, 2026, are no longer enforceable. This is due to the Business and Professions Code section 16608, added by Assembly Bill 692, which changes what employers can put in employment contracts.
The two biggest changes are:
- Voided Repayment Clauses: The law voids training-repayment and exit-fee clauses many employers have relied on to protect the cost of hiring, training, and relocating workers.
- A Real Penalty for Violations: A worker who successfully challenges one of these clauses can recover $5,000 or actual damages, whichever is higher, plus attorney's fees.
At Strategy Law, LLP, we regularly help California employers audit employment contracts, offer letters, and bonus agreements against new compliance requirements like this one. Below, we break down what the law actually prohibits, which contracts it reaches, and what you should review in your own agreements now.
What Contracts Are Banned Under California AB 692 & B&P Code 16608?
Section 16608 targets three kinds of contract terms in an employment agreement or work relationship entered into on or after January 1, 2026. UnderBusiness and Professions Code section 16608, the prohibited terms rarely use the words "stay or pay," since employers usually dress them up as training reimbursement, relocation clawbacks, or exit fees instead:
- Repayment for a Debt: A contract cannot require a worker to repay a debt to the employer, a training provider, or a debt collector once the work relationship ends.
- Resumed Debt Collection: A contract cannot let the employer resume debt collection or end a forbearance on a debt once the worker leaves.
- A Separation-Triggered Fee: A contract cannot impose a fee, penalty, or cost tied to the worker's departure itself.
The definition of debt in the statute reaches sign-on bonuses, quit fees, and reimbursement for immigration or visa expenses, regardless of whether the worker owes the money directly or a debt collector pursues it on the employer's behalf.
Liquidated damages tied to an early departure fall under the same ban. Assembly Bill 692 was signed into law in October 2025, giving employers a runway before the January 1 effective date, and the window has now closed.
Which Employment Agreements Are Affected?
Only New Agreements Are Covered
The ban is not retroactive. A contract term violates Section 16608 only when the underlying agreement was entered into on or after January 1, 2026, so an agreement signed in 2024 or 2025 is not voided by this statute on its own.
The Unresolved Question for Renewed Agreements
One point remains unresolved. Renewing, amending, or re-signing a pre-2026 agreement might pull it into the new law's reach, since the statute uses the phrase "entered into" without defining it further, and no California court has ruled on the question yet as of September 2026.
Are Pre-2026 Stay-or-Pay Agreements Still Enforceable?
For agreements signed before 2026, enforceability still turns on prior case law. In USS-POSCO Industries v. Case, a 2016 California Court of Appeal decision, the court upheld a $30,000 prorated training-reimbursement agreement because the training program was voluntary and the employee had another path to the same job. A repayment agreement built the same way before 2026 can remain enforceable, while one without those safeguards sits on much weaker ground.
Are Repayment Agreements Ever Legal? AB 692 Safe Harbor Rules.
The statute leaves a narrow safe harbor open for employers using legitimate sign-on bonuses or tuition reimbursement, but meeting only one condition will not save the arrangement. AB 692 treats them as a cumulative package.
To remain enforceable, a repayment agreement must meet all applicable statutory guardrails:
- Standalone Agreement: The repayment obligation must be set forth in a separate written document, completely unattached from the main offer letter or employment contract.
- Notice & Review Window: Employers must provide written notice informing the worker of their right to consult an attorney, along with at least five business days to review the agreement before signing.
- 2-Year Maximum Retention Cap: The retention or service commitment period cannot exceed two years.
- Prorated & Interest-Free Payback: Any required repayment must be prorated based on the remaining retention period and accrue zero interest.
- Restricted Departure Triggers: Repayment can only be triggered if the worker voluntarily resigns or is terminated for cause/misconduct.
- Option to Defer Bonus Receipt: For sign-on or retention bonuses, the worker must be offered the option to defer receiving the payout until the retention period ends to avoid any payback obligation entirely.
- Transferable Credentials for Tuition: Educational reimbursement is restricted to programs conferring a degree or transferable credential from an accredited institution that is useful beyond the current employer and not mandated as a condition of employment.
Missing even a single statutory guardrail invalidates the arrangement, converting it into an illegal stay-or-pay clause under Section 16608.
AB 692 Penalties: Statutory Damages and Employer Liabilities
Enforcement runs through a private right of action rather than a state agency alone. A worker, or a worker representative acting on behalf of a group of similarly situated workers, can sue directly, and the statute sets a $5,000 minimum recovery per worker or actual damages, whichever is higher.
Beyond the per-worker payout, a losing employer covers injunctive relief and the worker's attorney's fees and costs. A single non-compliant clause used across a hiring class, rather than one worker, multiplies the exposure quickly.
How to Update Your Employment Agreements
A quick internal audit now costs far less than a private lawsuit later, and the fixes are mostly paperwork rather than full contract rewrites. Here is where to start:
- Pull every offer letter, sign-on bonus agreement, and relocation package signed or renewed since January 1, 2026.
- Separate any repayment obligation into its own signed document rather than leaving it inside the main employment contract.
- Confirm the worker received notice of the right to consult counsel and a five-business-day window before signing.
- Flag any agreement re-executed or materially amended after January 1, 2026, since it might fall inside the new rules even if it originated earlier.
Waiting until a departing worker raises the issue is the most expensive way to find a gap. Reviewing contracts now, while the fix is simple paperwork, keeps a documentation problem from becoming a courtroom one.
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An overlooked stay-or-pay clause does not resolve on its own. Schedule a virtual consultation with Strategy Law, LLP today to have your employment agreements reviewed.
This blog is written as of September 2026. Recommendations and legal requirements are changing rapidly, so please continue to review our legal updates or review postings on relevant government websites.
All blogs on this site are for educational purposes only, do not constitute legal advice or opinion, and should not be applied to your situation, or any specific situation, without consultation with counsel. Strategy Law, LLP does not provide any legal advice concerning any matter discussed in a blog except upon formal engagement including, without limitation, execution of Strategy Law, LLP's formal legal services agreement, and with respect to specific factual situations. No blog constitutes a guaranty, warranty, or prediction regarding the result of any legal matter discussed in the blog or any representation.