California Bans Employee “Stay or Pay” Contracts

In further support of California’s longstanding opposition to employee mobility restrictions, on October 13, 2025, Governor Gavin Newsom approved a measure targeting “Stay or Pay” contracts that seek employee financial repayment tied to employment terminations. The final bill was originally intended to capture training repayment agreement provisions but bans broader stay or pay contracts. Employers should carefully review the new law, eliminate any banned arrangements, and modify those that are exempted (but subject to the law’s strict exemption requirements). We discuss the new law in more detail below.

The New Law Broadly Bans Most Stay or Pay Contracts.

The law adds new Section 16608 to California’s Business and Professions Code to bar employers, after January 1, 2026, from including in any employment contract, or requiring a worker to execute as a condition of employment or work relationship, a contract term that does any of the following:

• Requires a worker to pay an employer, a training provider, or debt collector 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; or
• Imposes any penalty, fee, or cost on a worker if the worker’s employment or work relationship with a specific employer terminates.

The statute defines “contract” broadly to include any promise, undertaking, contract, or agreement, whether written or oral and whether express or implied. “Debt” is also defined broadly to capture nearly all arrangements where the worker owes money, personal property or their equivalent to another for “employment-related costs, education-related costs, or a consumer financial product or service, regardless of whether the debt is certain, contingent, or incurred voluntarily.” Also broadly defined is the term “penalty, fee, or cost,” which includes but is not limited to “a replacement hire fee, retraining fee, replacement fee, quit fee, reimbursement for immigration or visa-related costs, liquidated damages, lost goodwill, and lost profit.”

The law is less clear as to the types of “workers” it protects. It defines “worker” as “a natural person who is permitted to work for or on behalf of an employer or business entity, or who is permitted to participate in any other work relationship, job training program, or skills training program.” While the definition appears broad, the law also states that “worker” “includes, but is not limited to, an employee or prospective employee.” Notably, the final amendment to the bill removed “independent contractors, freelance workers, externs, interns, apprentices, or sole proprietors” from the “worker” definition. The law includes a separate definition of “freelancer worker” but that term appears nowhere else in the law, suggesting a legislative drafting error. We will track further legislative and judicial developments on this issue.

The New Law Exempts Certain Types of Stay or Pay Arrangements from the Ban.

The law exempts five different types of contracts from the ban, including:

1. A contract entered into under any loan repayment assistance program or loan forgiveness program provided by a federal, state, or local governmental agency.
2. A contract related to the repayment of the cost of tuition for a transferable credential subject to certain requirements.
3. A contract related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards.
4. 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, also subject to certain requirements.
5. A contract related to the lease, financing, or purchase of residential property.

Employers Should Pay Close Attention to the Law’s Sign-on Bonus Compliance Requirements.

As noted above, the new law does not ban clawbacks of sign-on bonuses conditioned on the employee remaining with the employer, but it does impose certain limitations and other conditions before an employer may utilize this arrangement. 

Beginning on January 1, 2026, to have a viable clawback for new hires, employers must meet the following requirements:

1. Utilize a separate repayment agreement – one that is separate from the “primary” employment contract or offer letter.
2. Notify the prospective employee of the right to consult counsel regarding the agreement and provide a period of no less than 5 days to obtain that counsel before executing the agreement.
3. Prorate the repayment against the remaining term of the retention period, which cannot exceed two years (and the agreement cannot include an “interest accrual” component).
4. Permit the worker to defer receipt of the payment to the end of the retention period in lieu of the upfront payment that may create the repayment obligation.
5. Require repayment before the end of the retention period only if the worker, at their sole election, resigned, or where the employer separated the worker for misconduct.

It is common for employers who provide sign-on bonuses to include clawback requirements within the offer letter. However, employers must now move these employment terms to a separate agreement and provide the employee with sufficient time to review the separate agreement with counsel before signing. Employers should begin building in this new requirement into their hiring and onboarding now, before the law becomes effective. 

The law also suggests that only discretionary or unearned payments made “at the outset of employment” may qualify for the exemption. It is unclear whether courts will interpret the exemption to apply to retention bonuses and similar arrangements for current employees instead of only new hires. Regardless, retention arrangements may fall outside the scope of the law if the employee becomes eligible to receive the retention payment only after completing the retention period, rather than receiving the bonus upfront.

Next, employers should also consider how to document employment separations. The repayment obligation only applies if the employee “at their sole election” resigns – meaning that the repayment obligation may fall away in involuntary resignation scenarios or the employer separates the employee for “misconduct.” “Misconduct” in this context has the same meaning as it does under Section 1256 of the Unemployment Insurance Code, which generally includes dismissals for issues such as absenteeism, a breach of duty to the employer, dishonesty, insubordination, intoxication, tardiness, or violations of workplace rules or the law. Importantly, general poor performance, inefficiency, isolated mistakes, and good faith errors generally would not qualify as misconduct, unless repeated and previously addressed by the employer.

The New Law Comes with a Powerful New Enforcement Scheme.

The new law amends Labor Code §926 to confirm that contract terms entered into after January 1, 2026 that violate new §16608 are void as against public policy, and importantly, provides workers with a private right of action, which they can assert on behalf of themselves and “other persons similarly situated” (presumably a nod to PAGA). Employers found liable are subject to monetary damages in the amount of actual damages or $5,000, whichever is greater. In the class context, these damages are on a per worker basis. Workers can also seek injunctive relief and attorney’s fees and costs. 

The law also makes clear that the rights, remedies and penalties it establishes are “cumulative” and do not limit an employee’s right under other laws. Notably, since the new law makes a violation of §16608’s repayment ban the equivalent to California’s ban against illegal restraints of trade under Section 16600, employers should note that workers may invoke the remedy provided by Business and Professions Code §17200, also known as California’s Unfair Competition Law, of one year extension of the three-year statute of limitations period and authorizes equitable remedies, such as injunctions and restitution.

Employers Should Take Steps to Ensure Compliance Before the New Year.

Employers should carefully review their form employment offer letters and other agreements or policies with repayment requirements to determine if any restructuring is required to comply with the law’s requirements beginning on January 1, 2026. As part of this, employers should take steps to prepare “separate” repayment agreements and create a process that allows for an appropriate review of these agreements by new hires. 

While employers need not modify or rescind older agreements and other arrangements, employers should think about alternative retention tools that may be available once the ban takes effect. For example, an employer might refashion a retention agreement to provide for payment at the end of the retention period (including breaking up retention payments into installments in order to provide a portion of the retention payment to a current employee sooner without a clawback attached). 

Employers should also review offboarding procedures to ensure that separation decisions are clearly documented to reflect a resignation or a separation for misconduct. Employers reminding employees of their repayment obligations at the time of separation should be clear as to the repayment expectations consistent with the new law’s requirements. 

Mintz will continue to track for legal updates on this new law as they unfold. 

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