California Bans Stay-or-Pay Contracts and TRAPs

On October 13, 2025, California Gov. Gavin Newsom signed into law Assembly Bill 692, which prohibits employment contracts that require employees to repay employment-related costs, liquidated damages, and training costs when leaving their employer before the end of their contracted term. The authors of the bill believed that such contracts, commonly known as stay-or-pay contracts and training repayment agreement provisions (TRAPs), had become prevalent in several industries, such as health care and transportation, and had the effect of “entrapping workers into debt agreements that discourage them from speaking out against unfair wages or unsafe working conditions.” The law will create a new litigation minefield when it applies to all California employers on January 1, 2026.

AB 692, codified in the new Business and Professions Code section 16608, bans three types of contracts: (1) contracts requiring an employee or applicant to pay a debt, such as employment-related and education-related costs, if the employment or relationship terminates; (2) contracts authorizing an employer to collect a debt if the worker’s employment terminates; and (3) contracts imposing a “penalty, fee, or cost,” such as liquidated damages or replacement hire fees, if the worker’s employment terminates. The new law expressly states that a contract violating this section is a restraint on trade and thus void under Business and Professions Code section 16600.

The price for violating this new law can be onerous. AB 692, codified in the new Labor Code section 926, provides workers with a private right of action against the employer. Section 926 also creates a new representative action whereby a “worker representative may bring a civil action on behalf of … other persons similarly situated.” A “person” liable for violating this law is liable for either actual damages or $5,000, whichever is greater. “Person” is defined as both a natural person and an entity. Plaintiffs may also recover attorneys’ fees.

The new law provides several exceptions for employers, including recoupment of tuition costs and retention bonuses upon early separation. A contract for the repayment of tuition costs for a transferable credential is not prohibited as long as it is a stand-alone agreement, is not required as a condition of employment, specifies the repayment amount and period of employment, provides a prorated repayment amount, and does not require repayment if the worker is fired unless it is for misconduct. A contract for recovering a retention bonus is permissible as long as the repayment terms are in a separate agreement, the employee is told he or she may consult with an attorney before signing, the repayment does not accrue interest and is prorated to the time left in the employment term, the worker can defer receipt of the bonus to the end of the retention period, and the employee voluntarily resigns or is terminated for misconduct.

AB 692 applies only to contracts entered into on or after January 1, 2026. Please contact the authors of this article or a member of Carlton Fields’ national Labor and Employment Practice if you have questions about how to comply with this new California employment law.