California’s Assembly Bill 692

Background

While the restrictions imposed by AB 692 do not impact contracts entered into before January 1, 2026, for contracts entered into on or after January 1, 2026, it is unlawful to include, or require a worker (which includes, but is not limited to, an employee or prospective employee) to execute, a contract term that:

• Requires the worker to repay the employer, trainer, or debt collector if they leave the job.
• Authorizes the employer, training provider, or debt collector to resume or initiate collecting previously accrued debts after the worker’s departure.
• Imposes any penalty, fee, or cost if the work relationship ends, regardless of which party initiates the termination.

That said, the law contains specific exceptions in limited circumstances, including:

• A contract entered into under a loan repayment or loan forgiveness program.
• A contract related to tuition repayment for a transferable credential, so long as it meets specific requirements.
• A contract for enrollment in an apprenticeship program.
• A contract involving a discretionary payment, if the payment is not tied to specific job performance and the following conditions are met:
  • The terms are provided in a separate agreement.
  • The employee is informed of their right to consult an attorney and given at least five business days to do so.
  • The repayment obligation does not accrue interest and is prorated based on the remaining term, which cannot exceed two years from the date the payment is received.
  • The employee has the option to defer receipt of the payment until the retention period is completed.
  • Repayment is only required if the employee voluntarily resigns or is terminated for misconduct.
• A contract related to the lease, financing, or purchase of residential property.

Employer exposure

Employees may bring a civil action on behalf of themselves and “other persons similarly situated,” under Business and Professions Code section 16600 for contracts that violate the new law. If found liable, employers must pay either the actual damages suffered by the employee(s) or $5,000 per employee, whichever is greater. Employees may also pursue injunctive relief and recover reasonable attorneys’ fees and costs.

New York’s Trapped at Work Act

The New York Trapped at Work Act (the Act), bans “employment promissory notes,” defined as contract provisions requiring the worker to pay the employer a sum of money if the worker leaves, as well as contracts for repayment of training provided by the employer. Notably, the definition of “worker” under the Act expressly includes independent contractors, externs, interns, and volunteers. However, there remains an open question whether the law will apply retroactively to agreements signed before the effective date of December 19, 2025. That said, like California’s law, the Act contains specific exceptions in limited circumstances, including:

• A contract that requires the worker to repay any sum advanced by the employer that is unrelated to training.
• A contract requiring repayment for property that the employer has leased or sold to the worker.
• A contract requiring the worker to comply with the terms or conditions of sabbatical leave for educational employees.
• A contract entered into as part of a program agreed to by the worker’s collective bargaining representative.

Employer exposure

Employers can face fines by New York’s labor commissioner of at least $1,000, but no more than $5,000 for each violation, as well as attorneys’ fees. However, currently, workers are not permitted to bring a private right of action.

Next steps

While these new laws do not categorically ban all stay-or-pay contracts, employers should be thoughtful to structure these programs in a way that maximizes their effectiveness while remaining compliant. Employers should act now to review and update existing programs that require repayment and consult legal counsel, especially when it comes to training and education repayment and discretionary incentive programs. Importantly, employers should ensure that agreements comply with any particular statutory framework – for workers in California, for example, creating standalone agreements and providing workers with sufficient time to review and consult with counsel.

It is also important for employers to closely monitor how case law develops around these laws, as judicial interpretation may clarify the scope and enforceability of these programs.

Employers that conduct business across the country should also closely monitor state legislation relating to stay or pay contracts, as at least two other states – Minnesota and Ohio – have contemplated similar laws, but the bills have not yet been passed. These laws appear to be part of a growing trend, and employers should anticipate that other states will soon follow suit.