Assembly Bill 692, effective January 1, 2026, significantly changes how employers in California may use repayment or “stay-or-pay” clauses in employment-related agreements. As described in the last sections of this post, however, it is likely AB 692 does not apply to public employers given that the law does not state specifically that it does so. Nevertheless, public employers should be aware of the provisions of AB 692 so they can evaluate their “stay-or-pay” arrangements in the light of the possibility a court finds differently. As explained below, AB 692 broadly restricts contractual terms that require an employee to repay costs or fees when employment ends, unless the agreement fits within one of the statute’s limited exceptions.
What AB 692 Prohibits
AB 692 declares void and unenforceable any new contract provision that conditions repayment on an employee’s separation from employment. This includes terms requiring workers to:
The prohibition applies whether repayment would go to the employer directly, a training provider, or a third-party debt collector.
The law also creates a private right of action with statutory damages and attorney’s fees available to an employee.
What Remains Permitted
AB 692 provides narrow exceptions permitting certain repayment provisions when specific statutory conditions are met.
Tuition or Educational Assistance Agreements
These agreements may require prorated repayment but only if:
Sign-On or Retention Bonuses
Repayment provisions may be used if:
Apprenticeship and Loan-Forgiveness Programs
State-approved apprenticeship agreements and government-administered loan repayment assistance or loan-forgiveness programs remain unaffected.
Agreements that do not meet these criteria will be unenforceable.
How Stone v. Alameda Health System Affects Interpretation and Application of AB 692
The California Supreme Court’s explanation of how to interpret employment statutes leads to the likely result that AB 692 does not apply to public sector employers.
In August 2024, the California Supreme Court issued its decision in Stone v. Alameda Health System. Although Stone did not address repayment agreements, clawback provisions, or “stay-or-pay” arrangements, it is relevant because it clarifies the extent to which statutory provisions apply to public entities.
In Stone, the Court held that the California Labor Code’s meal- and rest-break provisions did not apply to Alameda Health System, a public agency employer, because the text of the statutes did not expressly include public agencies, demonstrating a lack of legislative intent to include them. Moreover, the “persons” covered by the statutes at issue do not include public agencies. The Court further held that public entities are not subject to civil penalties under the Private Attorneys General Act (PAGA) because they are not “persons” within the meaning of that statute, and because PAGA penalties are punitive.
What Stone Means
Because Stone directs courts to closely examine statutory definitions and legislative intent before applying Labor Code provisions to public entities, litigants may look to Stone when assessing whether AB 692 reaches public-sector employers.
Stone does not create a blanket rule that all employment-related statutes are inapplicable to public employers; its analysis is tied to the specific statutory language before the Court. However, courts have applied Stone’s reasoning to other statutes that regulate government agencies.
Practical Implications
Because AB 692 is not one of the statutes examined in Stone, it is uncertain how courts will apply it in the public-sector context. Nevertheless, it is likely based on the principles described in Stone that the statute does not apply to public sector employers. There are two statutes in AB 692 – Business & Professions Code section 16608, and Labor Code section 926. Neither statute contains any reference to public entities or any indication that the statutes are intended to apply to public entities. Also, the definition of “employer” under Business and Profession Code section 16608(a)(4) does not list any type of government agencies. This all supports a lack of any legislative intent to apply AB 692 to them.
Special Considerations for Charter Cities and Counties
In addition, charter cities and counties may have separate arguments under “home rule” principles allowing them to set employee compensation. Those agencies can argue these principles mean AB 692 does not apply to them. (Curcini v. County of Alameda.)
Wage and Hour Issues
Finally, it deserves mention that whether or not AB 692 applies to public employers, those employers still need to be careful – under other laws – with regard to any agreement to recover wages previously paid to employees. For example, under the federal Fair Labor Standards Act (FLSA), requiring an employee to repay training costs when they terminate employment could make it so their final paycheck for the last period of work amounts to less than the federal minimum wage for each hour of work. Such repayment agreements can thus lead to FLSA liability. This was the holding of the Court of Appeal in 2008 in City of Oakland v. Hassey. Relatedly, a final paycheck amounting to less than the state minimum wage for each hour of work could lead to liability under California law.
In evaluating your agency’s response to AB 692, it will be helpful to engage trusted legal counsel for assistance.