Reminder on New Restrictions Governing Employee Debts

Now that 2026 is well under way, employers may want to assess their

compliance with one of this year’s more nuanced new laws - AB 692 – governing

employee debts. AB 692 was enacted to prohibit employers from forcing employees

who resign to pay for work-related benefits such as trainings, or school tuition. The law

covers sign-on bonuses that induce an employee to stay on the job for a set period of

time. If the bonus policy requires repayment when an employee quits, it may violate

this new law. The new law applies only to contracts entered into on or after January 1,

2026.

The supporters of this new mandate claim that forcing employees to pay these

debts upon quitting discourages employee mobility – essentially preventing employees

from seeking out better jobs. They claim that imposing these obligations violates

California’s public policy encouraging competition and free trade.

The law includes a few exceptions, but they are limited. For example, AB692

does not apply to stand-alone sign on bonus agreements. However, these agreements

must include specific employee protections, and employers cannot require payment if

the employee is terminated without cause. The law does not apply to a tuition

repayment program, but only where such tuition is paid for a transferable credential -

—something the employee can use beyond the current job. And as with the sign on

bonus exception, no repayment can be required if the employee is terminated without

cause. Finally, the law does not apply to apprenticeship programs, provided the

program is officially approved by the California state agency that monitors

apprenticeship.

While the law does not expressly address policies that require employees to pay

for lost or damaged equipment, lost uniforms, or lost or damaged tools, the law is broad

enough to cover such policies. So, employers should review all such policies to make

sure they are not covered by the law. If a repayment obligation is triggered by an

employee’s resignation, it could be covered by this law.

The penalties for non-compliance are substantial. Employees subject to these

now-illegal debt collection policies can sue and recover actual damages or a minimum

of $5,000 per affected worker (whichever is greater), injunctive relief, and reasonable

attorney fees and costs. The law also allows workers to bring claims on behalf of other

“similarly situated” employees, increasing potential exposure.

In light of the foregoing, employers should check their onboarding forms and

hiring policies to ensure they do not have any outdated policies or contracts mandating

that employees are liable for a benefit if they quit or leave work before a set date. Most

form agreements drafted before 2026 will not meet the new standards and will have to

be updated.