On October 13, 2025, Governor Gavin Newsom enacted Assembly Bill No. 692 (AB 692), effectively adding Section 16608 to the Business and Professions Code and Section 926 to the Labor Code.
AB 692 directly impacts employers as it restricts employers’ contract rights. AB 692 makes it illegal to include in employment contracts any terms that require the worker to repay a debt if their employment ends, subject to a few exceptions.
The Bill was enacted in response to public policy concerns that these types of contracts place unnecessary restrictions on employees, preventing them from freely engaging in a lawful profession, trade, or business. As a result, such contracts are deemed void and contrary to public policy.
What Does AB 692 Prohibit?
AB 692 prohibits the inclusion of terms that require an employee to pay or reimburse an employer, training provider, or debt collector for any debt upon termination of the employment or work relationship. The law extends to provisions that impose penalties, fees, or any form of repayment obligation, or that authorize debt collection on the basis of a worker’s separation from employment.
When Does It Take Effect?
Effective January 1, 2026, this new law makes it unlawful for employers to include, or require workers to enter into, employment contracts obligating the worker to repay debts, fees, costs, or penalties if their employment or work relationship ends.
Who Does It Apply To?
All employers in California.
Are There Exceptions?
Government Loan Assistance/Forgiveness Plans: Contracts entered into under a federal, state, or local loan repayment assistance or loan forgiveness program.
Transferable Credential Tuition Costs: Contracts to repay the cost of tuition for a transferable credential are permitted if:
- separate from the employment contract;
- the transferable credential is not a condition of employment;
- specifies a repayment amount not exceeding the actual cost of the credential to the employer;
- repayment is prorated without acceleration; and
- repayment is not required unless the worker is terminated for misconduct.
Approved Apprenticeship Programs: Contracts related to enrollment in a Division of Apprenticeship Standards–approved apprenticeship program.
Discretionary Monetary Payments/Bonuses: Contracts for discretionary or unearned payments at the start of employment—such as sign-on bonuses not tied to specific job performance—are permitted if all of the following conditions are met:
- repayment terms are in a separate agreement from the employment contract;
- employee is notified of their right to consult an attorney about the agreement and is given at least five business days to do so;
- repayment, if triggered, is prorated based on the remaining term of any retention period, not to exceed two years, and not subject to accruing interest;
- employee may defer receipt of payment to end of retention period without obligation; and
- repayment is only required if the separation is at the employee’s sole discretion or due to employee misconduct.
Property Transactions: Contracts relating to the leasing, financing, or purchasing of residential property, including those under the California Residential Mortgage Lending Act.
What Are the Consequences of Non-Compliance?
Non-compliance may leave employers subject to private rights of action, such as minimum damages of $5,000 per affected worker, injunctive relief, attorney’s fees and legal costs associated with litigation, and possible regulatory scrutiny.
Employers Should Take Immediate Action
Since AB 692 becomes effective on January 1, 2026, employers should promptly review and update their employment contracts and practices to ensure compliance with the new requirements and avoid potential liability. Key steps include:
- Review and Revise Contracts: Audit all existing employment, incentive, and training agreements to identify and remove any provisions that may violate AB 692.
- Handle Exception-Based Contracts Carefully: For agreements that qualify for statutory exceptions (such as tuition repayment, bonuses, or apprenticeship programs), ensure they are clearly separated from general employment contracts and that all specific legal requirements are met.
- Update Training and Credentialing Strategies: Adjust any internal training, onboarding, or credentialing practices to align with AB 692’s requirements, and train HR and legal teams on compliant contract structures.
If you have any questions about compliance with AB 692, or need guidance on how to protect your organization from liability, please contact a Sheppard Mullin attorney for assistance.