Legislative Update: Further Limits on Contracts in Restraint of Trade (AB 692)

---

Wrapping up our 2025 legislative update, we wanted to highlight another employment-related measure that was signed recently, Assembly Bill 692, relating to contracts in restraint of trade.  This bill applies to all California employers and all contracts entered into on or after January 1, 2026.

Specifically, AB 692 makes it unlawful to include in any employment contract, or to require a worker to execute as a condition of employment or a work relationship a contract that includes, specified contract terms that require a worker to assume a debt if the employment is terminated, except as provided; provides that the unlawful contract is a contract in restraint of trade and is void; and provides for a private right of action.

What are TRAPs?

Training repayment agreement provisions, known as "TRAPs" or “stay or pay clauses,” refer to clauses in employment contracts that require the worker to pay for training programs if the worker leaves their job within a certain amount of time. These provisions are gaining popularity especially in light of many state and federal proposals to ban noncompete agreements that temporarily prohibit departing employees from joining or starting competing enterprises.

According to the author, Assemblymember Ash Kalra, “With the threat of financial ruin, stay-or-pay contracts or TRAPs discourage workers from speaking out against unsafe or unfair working conditions for fear of losing their jobs and being forced to pay off the debt… A worker’s ability to decide where they want to work and speak out against unfair wages or unsafe working conditions without the threat of retaliation is foundational to a free and fair economy. By prohibiting debt TRAPs, AB 692 levels the playing field and protects workers from being coerced into exploitative contracts.”

Detailed breakdown of the bill:

·         For contracts entered into on or after January 1, 2026, makes it unlawful to include in any employment contract, or to require a worker to execute as a condition of employment or a work relationship a contract that includes, a contract term that does any of the following:

    o   Requires the worker to pay an employer, training provider, or debt collector for a debt if the worker’s employment or work relationship with a specific employer terminates.

    o   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.

    o   Imposes any penalty, fee, or cost on a worker if the worker’s employment or work relationship with a specific employer terminates.

·         Specifies that the above contract provisions do not apply to any of the following:

o   A contract entered into under any loan repayment assistance program or loan forgiveness program provided by a federal, state, or local governmental agency.

o   A contract related to the repayment of the cost of tuition for a transferable credential that meets all of the following requirements:

1.  The contract is offered separately from any contract for employment.
2.  The contract does not require obtaining the transferable credential as a condition of employment.
3.  The contract specifies the repayment amount before the worker agrees to the contract, and the repayment amount does not exceed the cost to the employer of the transferable credential received by the worker.
4.  The contract provides for a prorated repayment amount during any required employment period that is proportional to the total repayment amount and the length of the required employment period and does not require an accelerated payment schedule if the worker separates from the employment.
5.  The contract does not require repayment to the employer by the worker if the worker is terminated, except if the worker is terminated for misconduct.

    o   A contract related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards.

    o   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, provided that all of the following conditions are met:

1.  The terms of any repayment obligation are set forth in a separate agreement from the primary employment contract.
2.  The employee is notified that they have the right to consult an attorney regarding the agreement and provided with a reasonable time period of not less than five business days to obtain advice of counsel prior to executing the agreement.
3.   Any repayment obligation for early separation from employment is not subject to interest accrual and is prorated based on the remaining term of any retention period, which shall not exceed two years from the receipt of payment.
4.   The worker has an option to defer receipt of the payment to the end of a fully served retention period without any repayment obligation.
5.  Separation from employment prior to the retention period was at the sole election of the employee, or at the election of the employer for misconduct.

    o   A contract related to the lease, financing, or purchase of residential property, as specified.

Questions?

Rosasco Law Group can help with any and all compliance needs in the employment law arena.  Now that the 2025 legislative session has come to a close, you may be reviewing recent enactments and wondering whether your workplace has crossed all of its t’s and dotted all of its i’s. Give our office a call to stay up-to-date with the latest laws.