Many California employers try to retain workers—or to recoup the cost of training, signing bonuses, or relocation—by requiring repayment if the employee leaves within a set period. These “stay-or-pay” clauses, sometimes called Training Repayment Agreement Provisions or “TRAPs,” are now sharply restricted. Effective January 1, 2026, Assembly Bill 692 added Section 16608 to the California Business and Professions Code, prohibiting most contract terms that require a worker to pay the employer—or a training provider or debt collector—when the employment relationship ends.

This guide explains what § 16608 prohibits, the narrow exceptions that still permit a valid repayment agreement, the strict conditions an employer must satisfy to use one, the $5,000-per-worker private right of action the statute creates, and the steps employers should take now to bring their agreements into compliance. Our firm advises California employers on employment and labor disputes.

What a “Stay-or-Pay” Clause Is

A stay-or-pay clause conditions money on continued employment. Common examples include an agreement to repay training or certification costs if you quit within two years, a sign-on bonus that must be returned if you leave early, a relocation-cost or tuition-repayment obligation triggered by departure, or a flat “you owe us $X if you leave” provision. Employers have long used these terms to protect their investment in a worker and to discourage turnover.

California now treats these arrangements with the same suspicion it applies to non-compete agreements, which the state voids under Business and Professions Code § 16600. The policy concern is the same: a financial penalty for leaving restrains worker mobility and can trap employees in jobs they would otherwise leave. (For related background, see our guide to non-compete agreements in California.)

What § 16608 Prohibits

The statute bars an employer from including in any employment contract—or requiring a worker to sign as a condition of employment—a term that does any of the following: requires the worker to pay the employer, a training provider, or a debt collector if the worker's employment terminates; authorizes the employer, training provider, or debt collector to resume or initiate collection of, or to end forbearance on, a debt if the worker's employment terminates; or imposes any penalty, fee, or cost on a worker because the employment terminates.

The term “debt” is defined broadly. It includes money, personal property, or their equivalent due or owing—or alleged to be due or owing—from a natural person, and expressly covers employment-related costs, education-related costs, and consumer financial products or services, whether the debt is certain, contingent, or incurred voluntarily.

The Ban Applies Prospectively

Timing matters. Section 16608 applies to contracts entered into on or after January 1, 2026, and it is not retroactive. Agreements signed before that date are not directly prohibited by the new statute. Employers should be careful, however: re-executing, renewing, or materially amending an agreement on or after January 1, 2026 can pull it within the ban, and attempting to enforce an older stay-or-pay term still carries litigation risk.

The Narrow Exceptions

The statute contains five exceptions, but they are narrowly drawn and demand strict compliance with multiple conditions. The two most useful in practice are a tuition-repayment exception, for the cost of distinct, transferable training the worker voluntarily chose, and an exception for certain upfront discretionary bonuses.

Even when an exception applies, an employer that wants an enforceable clawback for a worker hired on or after January 1, 2026 must satisfy each of several requirements. The repayment obligation must appear in a separate agreement, not buried in the employment contract. The employer must notify the worker of the right to consult counsel about the agreement and provide a period of no less than five business days to do so before the worker signs. The repayment amount must be prorated against the remaining portion of a retention period that cannot exceed two years. And repayment may be required before the end of the retention period only if the worker, at the worker's sole election, resigned, or if the employer separated the worker for misconduct. Miss any condition and the protection is lost.

The Penalty: A $5,000-Per-Worker Private Right of Action

Section 16608 has real teeth. It creates a private right of action allowing a worker—or a worker's representative—to bring a civil action individually and on behalf of others similarly situated. An employer found liable may be required to pay actual damages or $5,000 per worker, whichever is greater, in addition to injunctive relief and reasonable attorney's fees and costs. Because the statute reaches groups of similarly situated workers, a single noncompliant clause used across a workforce can generate exposure that multiplies quickly.

What Employers Should Do Now

• Inventory every agreement containing a repayment, clawback, or penalty term—offer letters, bonus plans, training and certification agreements, relocation agreements, and handbook provisions.
• Stop using stay-or-pay terms for 2026 and later hires unless the term fits a recognized exception and meets every condition.
• Move any permissible repayment term into a standalone agreement that includes the notice of the right to consult counsel and the mandatory five-business-day review period.
• Cap retention periods at two years, prorate the obligation, and limit repayment triggers to a voluntary resignation or a termination for misconduct.
• Do not condition employment on signing a repayment agreement.
• Have counsel review your bonus, tuition, and relocation programs before extending new offers.

Frequently Asked Questions

Q: Are our existing, pre-2026 stay-or-pay agreements now void?
A: The ban applies to contracts entered into on or after January 1, 2026, so pre-existing agreements are not directly prohibited by § 16608. Enforcing them still carries risk, and any new, renewed, or materially amended agreement must comply. Have counsel evaluate older agreements before you try to enforce them.

Q: Can we still recover genuine training costs when an employee leaves early?
A: Possibly, through the narrow tuition-repayment exception—but only if you use a separate agreement, provide the counsel notice and five-business-day review period, prorate the amount over a retention period of two years or less, and limit the trigger to a voluntary resignation or a termination for misconduct.

Q: Does the ban cover sign-on bonus clawbacks?
A: Generally, repayment-on-termination terms are restricted. An upfront discretionary bonus may fit within an exception, but only if the statute's conditions are met. Treat every clawback as presumptively covered until counsel confirms otherwise.

Q: What happens if we get it wrong?
A: A worker can recover actual damages or $5,000 per worker, whichever is greater, plus injunctive relief and attorney's fees—and the claim can be brought on behalf of all similarly situated workers, so the exposure scales with the size of your workforce.

Q: Does § 16608 apply to independent contractors?
A: The statute protects “workers,” a broad category. Treat repayment terms with contractors with the same caution and consult counsel before relying on them.

This article is provided for general informational purposes and is not legal advice.

Need help? Contact Kolmogorov Law, P.C. at (909) 235-6116 or visit kolmogorovlaw.com to schedule a consultation with our business litigation team in Irvine, California.