California ends sign-on bonus traps that keep workers stuck in jobs

A new law limits employer repayment demands

California workers got new protections on Jan. 1, 2026.

Assembly Bill 692 now bars most employment contract clauses that force workers to repay their employers when they leave a job.

These clauses, often called “stay-or-pay” provisions, can cover everything from training costs to sign-on bonuses to relocation expenses. Contracts that break the new rules are void under California law.

The change targets a practice that critics say traps workers in jobs they want to leave.

Stay-or-pay clauses spread to lower-wage jobs

Assemblymember Ash Kalra of San Jose wrote the bill, and Gov. Gavin Newsom signed it on Oct. 13, 2025. Backers say these clauses stop workers from leaving bad jobs, reporting unsafe conditions, or chasing better pay.

A 2020 Cornell study found that nearly 10% of American workers had one of these agreements.

What started in high-paying specialized fields has spread to trucking, healthcare, retail, and even pet grooming, hitting workers who can least afford the penalties.

The law covers a wide range of penalties

The law casts a wide net. Employers cannot require workers to pay back the company, a training provider, or a debt collector when they leave. They also cannot start or restart debt collection after a worker quits.

Quit fees, replacement-hire fees, visa cost reimbursements, and other penalties are all off the table. It does not matter whether the agreement is written or spoken, spelled out or just implied.

If it punishes a worker for leaving, it likely violates the law.

Most workers qualify, with some gray areas

The law defines “worker” broadly to include employees, job applicants, and people in training programs.

But it does not clearly say whether independent contractors or freelancers are covered, and the California Labor Commissioner has not weighed in yet. Public employers are probably not covered either.

A California Supreme Court ruling in Stone v. Alameda Health System found that employment laws must specifically say they apply to public entities to take effect.

Sign-on bonuses still come with conditions

Employers can still ask workers to repay sign-on bonuses, but the rules are tight. The repayment terms must sit in a separate agreement from the main employment contract.

Workers must get at least five business days to consult a lawyer before signing. Any repayment has to be prorated and cannot stretch beyond two years.

No interest allowed. Workers can also choose to defer the bonus until the retention period ends, which wipes out the repayment obligation entirely.

Repayment kicks in only if the worker leaves voluntarily or gets fired for misconduct.

Tuition repayment survives under narrow rules

Employers can still seek repayment for tuition toward what the law calls a “transferable credential,” meaning a degree from an accredited school.

The key is that the degree cannot be a requirement for the worker’s current job and must be useful beyond that one employer. The tuition agreement must be separate from the employment contract.

The repayment amount must be set in advance, cannot exceed the employer’s actual cost, and must be prorated. Termination cannot trigger repayment unless it involves misconduct.

Several types of contracts stay exempt

A handful of contract types fall outside the law. Government-run loan repayment or loan forgiveness programs are exempt, along with state-approved apprenticeship programs and contracts tied to residential property leases or purchases.

One important detail: the law does not apply retroactively. Contracts signed before Jan. 1, 2026, remain enforceable.

There is also no carve-out for employers who voluntarily paid medical insurance premiums during a worker’s leave of absence.

Workers can sue and recover damages

Workers hit with a banned contract clause can file a lawsuit on their own behalf and on behalf of others in the same situation.

Employers found in violation owe the greater of the worker’s actual damages or $5,000 per worker. Courts can also award attorney’s fees, costs, and orders to stop the practice.

The state treats violations as unfair competition.

Workers may also bring claims under the Private Attorneys General Act (PAGA), which can raise the financial stakes for employers.

Gray areas remain for employers

The law leaves some questions open. It does not address whether dropping repayment obligations creates tax issues for workers who already received bonuses or other payments.

Relocation benefits are tricky because workers usually need the money upfront to move, making proration or deferral hard to apply. The law also does not specifically mention collective bargaining.

Newsom’s signing statement encouraged follow-up legislation in 2026 to address that gap. Employers should review offer letters, bonus agreements, and training policies before using them with new hires.

A major hospital chain showed the problem

In July 2025, months before AB 692 took effect, the attorneys general of California, Colorado, and Nevada settled with HCA Healthcare for about $2.9 million.

HCA, one of the largest for-profit hospital systems in the country, had required new nurses to sign repayment agreements as a condition of employment.

Nurses who left within two years got billed for training costs, and unpaid balances went to debt collectors. HCA stopped using the agreements in 2023 after a national news investigation.

Other states are banning these clauses too

California is not alone. New York signed the Trapped at Work Act on Dec. 19, 2025, banning most of these agreements statewide. Colorado put restrictions in place in 2022 and expanded them in 2024.

Bills targeting these clauses have come up in Minnesota, Ohio, Vermont, Indiana, and Wyoming.

The push picked up speed after the Federal Trade Commission backed away from a proposed nationwide non-compete ban, leaving states to act on their own.

What workers should do now

The law does not touch contracts signed before Jan. 1, 2026. Those agreements remain in effect.

But workers asked to sign a new employment, bonus, or training agreement on or after that date should read it carefully.

If the contract demands repayment for leaving, workers should check whether it fits one of the narrow exceptions. Anyone who believes an employer is using a banned clause can talk to a lawyer or file a complaint.

The law builds on California’s existing ban on non-compete agreements.

This article was created with AI assistance and human editing.

Read more from this brand:

• Minnesota Workers Get Guaranteed 15-Minute Breaks Starting in 2026
• The Federal Minimum Wage Hasn’t Budged Since 2009. 20 States Are Fine With That.
• Crime victims in California can now use paid sick leave for court