California’s AB 692, signed into law on October 13, 2025, and effective January 1, 2026, will make it unlawful to include in any employment contract, or to require a worker to execute as a condition of employment or a work relationship, a contract term that does any of the following: 

• 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. 

• Authorizes the employer, training provider, or debt collector to resume or initiate collection of or end forbearance on a debt if the worker’s employment or work relationship with a specific employer terminates. 

• Imposes any penalty, fee, or cost on a worker if the worker’s employment or work relationship with a specific employer terminates. 

Under the new statute, any contract including such terms would prevent an individual from participating in a lawful profession, trade, or business, and will therefore be considered void under public policy. 

The statute does make exceptions for certain types of contracts, including, but not limited to the following:  

• A contract for any loan repayment assistance program or loan forgiveness program provided by a federal, state, or local governmental agency. 

• A contract related to the repayment of the cost of tuition for a transferable credential that meets all the following requirements:
  • The contract is offered separately from any contract for employment. 
  • The contract does not require obtaining the transferable credential as a condition of employment. 
  • 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. 
  • 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. 
  • 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. 

• A contract related to enrollment in an apprenticeship program approved by the state’s Division of Apprenticeship Standards. 

• 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 the following conditions are met: 
  • The terms of any repayment obligation are set forth in a separate agreement from the primary employment contract. 
  • The employee is notified that they have the right to consult an attorney regarding the agreement and are provided with a reasonable time period of not less than five business days to obtain advice of counsel prior to executing the agreement. 
  • 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. 
  • The worker has an option to defer receipt of the payment to the end of a fully served retention period without any repayment obligation. 
  • 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. 

AB 692 allows a private right of action for violation of the statute which can be brought by the employee, or a worker representative bringing an action on behalf of the employee, other persons similarly situated, or both. Penalties under the statute include liability 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 attorneys’ fees and costs. 

Before January 1, 2026, employers should consider the following: 

• Review Agreements That Contain Repayment Terms: Carefully review all employment contracts, apprenticeship agreements, and any documents related to discretionary or unearned payments to ensure they do not include any prohibited terms or conditions.  

• Implement Notification and Consultation Procedures: Establish a standardized process that allows employees and applicants a reasonable period of time to review and seek legal guidance before signing any repayment agreement. Ensure the process is consistently followed and includes a notice provision and guidance on documenting the process.  

• Train HR and Management Teams on Compliance and Enforcement: Provide training to HR and management teams on AB 692’s restrictions, including the prohibition on accelerated repayment schedules, interest accrual, and the conditions triggering repayment. To provide a complete picture of the risk for non-compliance, be sure to include information on potential penalties and the private right of action available to employees.