It’s a TRAP! California’s New Law on Worker Repayment Agreements
On October 13, 2025, Governor Gavin Newsom approved AB 692, California’s new anti-TRAP law. AB 692 adds Business and Professions Code section 16608 and Labor Code section 926 to the state’s voluminous list of employment laws.
Under the new laws, starting on January 1, 2026, California employers will be prohibited from requiring workers to repay a debt or to pay a penalty for terminating the employment (or other working) relationship, with some exceptions. Violations may give rise to expensive penalties.
What is a “TRAP”?
“TRAPs,” or training repayment agreement provisions, are agreements that require an employee to repay their employer for certain debts if they leave the job within a certain period of time. Employers often use these agreements to mitigate risk when advancing payments for voluntary training or unearned bonuses. For example:
An employer would like to offer the benefit to employees to pay for their training or education. This will benefit the employee, who earns new skills or a certification or degree, and will also benefit the employer if the employee stays. However, if the employee leaves right after receiving the training or education, the employer requires the employee to pay for that cost.
An employer wants to provide an employee with a retention bonus to encourage the employee to stay for a year. However, as a benefit to the employee, the employer offers to advance the retention bonus and pay it now, before it is earned. If the employee leaves before the year is completed, the employer requires the employee to pay back the unearned portion of the bonus.
These “TRAPs” are put in place to protect the employer from losing out on their investment in an employee. However, they have often been criticized as literally “trapping” the employee from leaving the job due to the employee’s inability to repay the debt they would owe.
California legislators view these “TRAP” agreements as having an anticompetitive effect and have taken action to limit these agreements going forward.
AB 692 and its Exceptions
For agreements entered into on or after January 1, 2026, the new law generally prohibits California employers to include (or require a worker to agree to) a contract term that does any of the following:
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 ends.
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 ends.
Imposes any penalty, fee, or cost on a worker if the worker’s employment or work relationship with a specific employer ends.
There are several exceptions built into the law, discussed below.
Discretionary or Unearned Bonuses Paid Upfront
The law contains a narrow exception for discretionary or unearned bonuses that are paid upfront or at the outset of employment and are not tied to specific job performance, such as signing or retention bonuses paid in advance of meeting the retention requirement. For such bonuses, the agreement may contain a repayment obligation if the employee leaves early, but only if all of the following conditions are met:
The terms of any repayment obligation are set forth in a separate agreement from the primary employment contract.
The employee is notified that they have a right to consult with an attorney regarding the agreement.
The employee is provided with at least 5 business days to obtain advice of counsel before signing the agreement.
Any repayment obligation for early termination is not subject to interest accrual.
Any repayment obligation for early termination is prorated based on the remaining term of any retention period, which shall not exceed 2 years from receipt of the payment.
The worker has an option to defer receipt of the payment to the end of a fully served retention period without any repayment obligation.
Repayment is only required if the employee voluntarily resigns at their sole election; or if the employee is fired for "misconduct" as defined in the Unemployment Insurance Code (i.e. a willful or wanton disregard for, and breach of, a duty to the employer).
Repayment of tuition or transferrable credential
Contracts related to the repayment of a transferrable credential or the cost of tuition may contain repayment obligations, but only if all of the following conditions are met:
The contract is offered separately from any contract for employment.
The contract does not require obtaining the transferrable credential as a condition of employment.
The contract specifies the repayment amount before the worker agrees to the contract.
The repayment amount does not exceed the cost to the employer of the transferrable credential received by the worker.
The contract provides for a prorated payment amount during any required employment period that is proportional to the total repayment amount and the length of the required employment period.
The contract does not require an accelerated payment schedule if the worker separated from the employment.
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.
Other exceptions
Other exceptions include contracts entered into under a loan repayment assistance program or loan forgiveness program provided by a federal, state, or local government agency; contracts related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards; and contracts related to the lease, financing, or purchase of residential property.
Effective Date and Retroactivity
The new law only applies to agreements entered into on or after January 1, 2026. There is no retroactive effect.
For agreements signed before 2026, they may continue to be in place and be enforced as long as they are otherwise lawful. That said, practically speaking, given the state’s constant hostility to noncompetes and other anticompetitive policies and practices, it would not be surprising if all “TRAP” arrangements fall under heightened scrutiny going forward.
Penalties for Noncompliance
Any non-compliant agreements give rise to a claim by the employee for actual damages or $5,000, whichever is greater, plus attorneys' fees, costs, and injunctive relief.
Employers of California-based employees should ensure that their template offer letters, bonus agreements, employment contracts, tuition repayment agreements, and other contracts that may require worker repayment of a debt are compliant with the new state laws.