California’s AB 692 – Immediate action required for employee repayment agreements

Effective January 1, 2026, California’s AB 692 will significantly alter an employer’s ability to require workers to repay money or costs when employment ends. Employers should take prompt steps to review and update all offer letters and repayment agreements, including, but not limited to, sign-on bonuses, and tuition-repayment programs to avoid exposure. 

Overview

For employment contracts entered on or after January 1, 2026, AB 692 makes it unlawful for an employer to include, or otherwise require as a condition of employment, a term that:

1. Requires the employee (or prospective employee) to pay an employer, a training provider, or a debt collector for a debt if the employment or work relationship ends.
2. Authorizes the employer, a training provider, or a debt collector to collect or end forbearance on a debt if the employment or work relationship ends.
3. Imposes any penalty, fee, or cost on the worker or employee if the relationship ends.

The statute broadly defines debt as “money, personal property, or their equivalent that is due or owing . . . from a natural person to another person, including, but not limited to, employment-related costs, education-related costs, or a consumer financial product or service, regardless of whether the debt is certain, contingent, or incurred voluntarily.”

The bottom line is that employment contracts or agreements containing clawbacks tied to continued employment will be significantly curtailed beginning January 1, 2026. 

Limited exceptions: What employers can still do

AB 692 contains five exceptions, three of which may be relevant to many employers.

Sign-on bonus repayment contracts

AB 692 provides an exception for contracts for the receipt of a discretionary or unearned monetary payment — including a financial bonus — at the outset of employment that is not tied to specific job performance, if all the following conditions are met:

• The repayment terms must be in a separate agreement from the primary employment contract.
• The employee must be notified of their right to consult an attorney regarding the agreement and given a reasonable time period of not less than five business days prior to executing the agreement to do so.
• “Any repayment obligation for early separation from employment is not subject to interest accrual and is prorated based on the remaining term of any retention period” (not to exceed two years from the receipt of payment).
• “The worker has an option to defer receipt of the payment to the end of a fully served retention period without any repayment obligation.”
• Separation from employment before the retention period is at the sole election of the employee, except if a termination by the employer is for misconduct.

Tuition repayment for transferable credentials

AB 692 establishes an exception for contracts related to the repayment of the cost of tuition if it is for a transferable credential, and certain conditions, set forth below, are met:

• It is offered separately from any contract for employment.
• It “does not require obtaining a transferable credential as a condition of employment.”
• It specifies the repayment amount (not to exceed the cost to the employer) before the worker agrees to the contract.
• 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.”
• It “does not require repayment to the employer by the worker if the worker is terminated, except if the worker is terminated for misconduct.”

Apprenticeship program repayment

There is also an exception for contracts related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards.

Potential exposure

AB 692 provides potential remedies, including recovery of damages and injunctive relief, and attorney’s fees and costs.   

Action items for employers

To prepare for AB 692’s effective date, employers should begin by conducting a comprehensive review of all sign-on bonus terms and any repayment provisions tied to continued employment that are to be entered on or after January 1, 2026.  Importantly, employers should update template documents in advance of 2026 onboarding to avoid noncompliant agreements. 

Conclusion

AB 692 represents a major shift in California’s approach to repayment provisions and employee mobility. While some flexibility remains, the exceptions are narrow and highly technical. 

We recommend undertaking a proactive review now to ensure that all employment agreements entered on or after January 1, 2026 align with AB 692 to minimize litigation risk.