“Stay or Pay” Employment Agreement Provisions Prohibited in the New Year
Pursuant to the state’s Business and Professions Code, California employers are prohibited from restraining employees from engaging in a lawful profession, trade, or business. These prohibitions, among other things, prevent most non-compete agreements.
Senate Bill 692, signed into law on October 13, 2025, adds Business and Professions Code section 16608 and Labor Code section 926, and provides that, for contracts entered into on or after January 1, 2026, employers may not include any term or otherwise require a worker to agree, as a condition of employment or work relationship, that: (1) the worker will repay the employer, training provider, or debt collector for a debt if the worker’s employment or work relationship with a specific employer terminates: (2) the employer, training provider, or debt collector may resume or initiate collection of or end forbearance on a debt if the worker’s employment or work relationship with a specific employer terminates; or (3) a penalty, fee, or cost may be imposed on a worker if the worker’s employment or work relationship with a specific employer terminates. Any such terms will be considered void and contrary to public policy.
A “worker” means a natural person who is permitted to work for or on behalf of an employer or business entity, or who is permitted to participate in any other work relationship, job training program, or skills training program, and includes, but is not limited to, an employee or prospective employee. A “debt” means money, personal property, or their equivalent that is due or owing or alleged to be due or owing from a natural person to another person, including, but not limited to, for 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 prohibition does not apply to the following:
1. A contract entered into under any loan repayment assistance program or loan forgiveness program provided by a federal, state, or local governmental agency;
2. A contract related to the repayment of the cost of tuition for a transferable credential that meets all of the following requirements: (a) the contract is offered separately from any contract for employment; (b) the contract does not require obtaining the transferable credential as a condition of employment; (c) the contract 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; (d) the contract 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 (e) the contract does not require repayment to the employer by the worker if the worker is terminated, except if the worker is terminated for misconduct;
3. A contract related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards;
4. A contract 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, provided that all of the following conditions are met: (1) the terms of any repayment obligation are set forth in a separate agreement from the primary employment contract; (b) the employee is notified that they have the right to consult an attorney regarding the agreement and provided with a reasonable time period of not less than five business days to obtain advice of counsel prior to executing the agreement; (c) 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, which shall not exceed two years from the receipt of payment; (d) the worker has an option to defer receipt of the payment to the end of a fully served retention period without any repayment obligation; and (e) 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; or
5. A contract related to the lease, financing, or purchase of residential property, including, but not limited to, a contract pursuant to the California Residential Mortgage Lending Act.
A worker who has been subjected to conduct in violation of these prohibitions may bring a civil action on behalf of that worker, other persons similarly situated, or both. Any person found liable for a violation of these prohibitions is liable for actual damages sustained by the worker or workers on whose behalf the case is brought, or $5,000 per worker, whichever is greater, in addition to injunctive relief, and reasonable attorney’s fees and costs.
This legal update and any use of its information does not create an attorney-client relationship. Nothing contained on this website should be considered legal advice for any specific employer or employment situation. Consult legal counsel before taking any action as a result of information contained herein.
