California’s AB 692 Introduces Restrictions on Employment Contract Repayment Terms

California Gov. Gavin Newsom recently signed Assembly Bill 692 (AB 692), which prohibits employers from including “in any employment contract, or to require a worker to execute as a condition of employment or a work relationship a contract that includes” specified contract terms, including any term that “requires the worker to pay an employer, training provider, or debt collector for a debt if the worker’s employment or work relationship with a specific employer terminates.” The law goes into effect Jan. 1, 2026.

The bill creates a private right of action, allowing affected workers to bring claims on behalf of themselves and similarly situated individuals. Remedies include minimum damages of $5,000 per affected worker, injunctive relief and recovery of attorneys’ fees and costs.

While AB 692 restricts certain repayment obligations, it includes several important exceptions:

• Loan Repayment Assistance/Forgiveness Programs: Contracts “entered into under any loan repayment assistance program or loan forgiveness program provided by a federal, state, or local governmental agency” are excluded.
• Tuition/Transferable Credential Repayment Agreements: Agreements for “the repayment of the cost of tuition for a transferable credential” are excluded, provided all of the following conditions are met:
  • The agreement is offered “separately from any contract for employment.”
  • “The contract does not require obtaining the transferable credential as a condition of employment.”
  • The repayment amount is specified in advance, not exceeding “the cost to the employer of the transferable credential received by the worker.”
  • The agreement 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.”
  • Repayment is not required if the worker is terminated, “except if the worker is terminated for misconduct.”
• Apprenticeship Programs: Contracts “related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards” are excluded.
• Upfront Discretionary/Unearned Payments (e.g., Signing Bonuses): Contracts for discretionary or unearned monetary payments “at the outset of employment that is not tied to specific job performance” are excluded, provided all of the following conditions are met:
  • Repayment terms are in a “separate agreement from the primary employment contract.”
  • The employee is told of the right to consult an attorney and given at least five business days to do so prior to executing the repayment obligation agreement.
  • Repayment is “not subject to interest accrual” prorated based on the remaining retention period — up to two years — and may be deferred until “the end of a fully served retention period.”
  • Repayment may only be required if separation is voluntary or due to employee misconduct.
• Property Transactions: Contracts relating to the “lease, financing, or purchase of residential property, including, but not limited to, a contract pursuant to the California Residential Mortgage Lending Act” are excluded.

Key Takeaways for Employers:

• Review and update existing contracts to ensure compliance with the new requirements. Employers should carefully review all agreements — including training repayment, tuition and bonus clawback provisions — to ensure compliance with AB 692 before January 1, 2026. Noncompliant terms could expose employers to liability.
• Assess whether repayment programs can fit within an exception. Employers using repayment or retention agreements should evaluate whether these programs can be restructured to meet the requirements of an exception.
• Consult experienced employment counsel. Early preparation will help mitigate legal and financial risk. Please reach out to Paul Hastings to discuss strategies specific to your needs.