New Year, new legislation — California and New York are leading the way in restricting certain “stay-or-pay” provisions in employment contracts. These types of provisions are relatively common. For example, an employer may offer a signing bonus with the proviso that the incentive would be clawed back if the employee leaves before a specified period or may provide training assistance structured as a loan that becomes repayable if the employee does not remain with the company long enough. Increasingly, however, some states view these arrangements as limiting employee mobility and have enacted employee-friendly legislation aimed at curbing contractual terms that arguably penalize workers for changing jobs.

California

On January 1, 2026, Assembly Bill 692 will become effective. With some narrow exceptions, employers will no longer be able to require employees who leave or applicants who do not join a company to repay certain monetary costs. For example, the new law prohibits employers from requiring departing employees to repay certain types of retention bonuses, tuition reimbursement payments, training fees, and repayment for immigration or relocation expenses.

On the other hand, the law does not apply to a contract entered into under a loan repayment assistance program, contracts providing for discretionary monetary payments that are not tied to specific job performance (provided certain statutory conditions are satisfied), or agreements relating to tuition repayment that meet defined requirements.

Significantly, AB 692 provides a private right of action for covered employees or applicants. Employers found to be in violation could be subject to monetary damages, injunctive relief, and reimbursement of attorneys’ fees and costs.

New York

The “Trapped at Work Act” (Assembly Bill A584C) would prohibit employers from requiring workers to repay the costs of job-related training. In June 2025, the act passed the state legislature and is currently awaiting signature by the governor. The act provides that “[t]he execution of an employment promissory note as a condition of employment is unconscionable, against public policy, and unenforceable.”

The legislation includes limited exceptions, such as agreements requiring repayment of sums advanced to a worker that are unrelated to training, or reimbursement for property sold or leased by the employer to the worker.

Notably, the act applies to “workers,” which includes, but is not limited to, employees, independent contractors, interns, and volunteers. In addition, the act provides for the recovery of attorneys’ fees in cases in which an employer sues a worker to enforce an unconscionable agreement. If signed into law, the Trapped at Work Act will take effect immediately.

Tips for Employers

• Review offer letters, employment contracts, training agreements, and any other relevant onboarding documents to adjust or eliminate “stay-or-pay” language as needed.
• Consider providing for positive incentives for staying — such as deferred vesting incentives, profit sharing, or milestone bonuses — instead of using “stay-or-pay” language.
• Review the specific exceptions and requirements contained within the new laws to carefully draft language that adheres to the carveouts. These carveouts may require drafting a separate written agreement related to the repayment obligation.

Other states may soon follow suit in restricting certain types of “stay-or-pay” clauses, and jurisdictions such as Colorado already have similar policies in place. Because “stay-or-pay” laws vary by jurisdiction, employers should review their agreements carefully and consult employment counsel.