Overview

A recent wave of state laws reflects a rethinking of the use of “stay-or-play” arrangements in employment agreements. Joining Connecticut, Colorado and other states, California and New York have recently enacted laws that narrow the circumstances in which an employer may require an employee to repay training costs, signing bonuses and other debts upon their separation from employment. Employers operating in these states should take care when documenting repayment arrangements to comply with these new requirements.

Background: The Federal Landscape and State Response

Recent state legislation follows the effective collapse of federal efforts to regulate practices and policies that are perceived to restrict employee mobility. In April 2024, the Federal Trade Commission (FTC) issued a sweeping rule that would have banned most employee noncompetition agreements as well as certain training repayment agreement provisions (so-called “TRAPs”). Federal courts blocked that rule before it could take effect, and, in September 2025, the FTC—under a new administration—withdrew its appeals defending the rule. 

With federal action stalled, states have moved to fill the void. Most recently, California and New York have adopted legislation addressing training repayment agreements and similar stay-or-pay mechanisms.

California: AB 692

What the Law Does

Effective January 1, 2026, California law prohibits employers—subject to certain key exceptions detailed below—from including in an employment contract, or requiring a worker as a condition of employment to execute a contract that includes, a contract term that requires the worker to repay the employer for a debt or that otherwise imposes a penalty on the worker upon separation from employment.

The law applies broadly to “workers,” including, but not limited to, employees and prospective employees (but notably does not explicitly apply to independent contractors and freelance workers, as had been contemplated by an earlier version of the law). “Employer” also is defined expansively to include parent companies, subsidiaries, divisions, affiliates, hiring parties, contractors and third-party agents.

Key Exceptions

AB 692 does not prohibit all employee repayment agreements. In addition to exemptions provided for certain government loan programs, apprenticeship programs and contracts relating to residential property, the following are expressly carved out from AB 692’s prohibition:

Up-front bonuses. Employers may require repayment of a financial bonus or other discretionary, unearned payment made at the outset of employment, such as a signing bonus or relocation benefit, provided (a) the repayment obligation is in a separate agreement; (b) the worker is notified that they have the right to consult an attorney and is given at least five business days to review the agreement before signing; (c) the repayment obligation is prorated over a retention period of no more than two years, with no interest accrual; (d) the worker has the option to defer receipt of the payment to the end of the retention period with no repayment obligation; and (e) early separation is at the worker’s sole election or by the employer for “misconduct” (as that term is defined under California unemployment law).
Certain tuition assistance. Employers may require repayment of tuition costs for a “transferable credential.” A transferable credential is defined as an accredited third-party degree that is not required for the worker’s current employment and is useful for employment beyond the current employer. In order for such a debt to be subject to repayment, the law provides that (a) the repayment agreement must be separate from the employment contract; (b) the credential cannot be required as a condition of employment; (c) the repayment amount must be disclosed in advance and cannot exceed the employer’s actual cost; (d) repayment must be prorated over the relevant retention period and the payment schedule cannot be accelerated upon separation; and (e) repayment must not be required if the worker is terminated other than for misconduct.

Retention bonuses offered to existing employees present an unresolved issue under AB 692, as the statute expressly addresses bonuses offered “at the outset of employment” but not those offered thereafter, leaving employers without clear guidance about the permissibility of requiring repayment of such bonuses.

Similarly, not expressly covered by the statute are employer loans that require repayment by the employee regardless of whether they continue to provide services to the employer (though we note such a loan should fall outside the scope of the law because repayment is not triggered by termination of employment). 

Enforcement and Remedies

AB 692 creates a private right of action, permitting a worker (or the worker’s representative) to bring a civil action on their own behalf or on behalf of others. An employer found liable is subject to actual damages or $5,000 per worker, whichever is greater, plus injunctive relief and reasonable attorney’s fees and costs. The potential for class action and Private Attorneys General Act (“PAGA”) exposure makes compliance review particularly important for California employers.

New York: The “Trapped at Work Act”

New York’s “Trapped at Work Act” (the “Act”) was enacted on December 19, 2025, and amended on February 13, 2026. The amendment narrowed the law’s scope in several significant respects and postponed its effective date for one year.

What the Law Does

As amended, the Act prohibits an employer from requiring, as a condition of employment, an employee or prospective employee to execute an “employment promissory note”—defined as any instrument, agreement or contract provision requiring an employee to pay the employer a sum of money if the employee’s employment relationship with that employer terminates before the passage of a stated period of time. 

The amendment narrows the law’s coverage to “employees” (defined as persons employed for hire by an employer in any employment), replacing the original statute’s broader coverage of “workers” (which included interns and independent contractors).

Key Exceptions

In addition to contracts related to residential property, sabbatical leaves and collective bargaining agreements, the amended Act expressly permits the following types of repayment agreements:

Bonuses and relocation assistance. Agreements requiring repayment of a financial bonus, relocation assistance or other noneducational incentive upon separation from employment are permitted unless (x) the employee was terminated for any reason other than misconduct (which term is not defined but likely has the same meaning as under New York unemployment law) or (y) the duties or requirements of the job were misrepresented to the employee. Unlike its California counterpart and the tuition repayment exception below, this exception does not require a standalone agreement or have other repayment limitations.
Certain tuition assistance. Similar to the California law, employers may recover the cost of tuition, fees and required educational materials for a “transferable credential.” To qualify, the repayment agreement must (a) be in a written contract offered separately from the employment contract; (b) not condition employment on obtaining the transferable credential; (c) specify the repayment amount (not to exceed the employer’s actual cost) in advance; (d) provide for prorated repayment proportional to the total repayment amount and the length of the required employment period with no accelerated payment schedule upon separation from employment; and (e) not require repayment to the employer if the employee is terminated, except if the employee is terminated for misconduct.

Enforcement and Remedies

Unlike California’s law, the New York Trapped at Work Act does not provide a private right of action. Instead, the New York State Department of Labor is granted authority to bring enforcement actions. Employers found to have violated the Act may be fined between $1,000 and $5,000 per violation, with each affected employee representing a separate violation.

The Broader State Landscape

California and New York are not alone. Connecticut has prohibited employment promissory notes as a condition of employment since 1985, making it the earliest adopter of this type of restriction. The Connecticut law applies to employers with 26 or more employees and contains exceptions similar to those in the newer statutes, including carve-outs for repayment of advances, property sales or leases, sabbatical leave obligations, and collectively bargained arrangements. In 2024, Colorado passed a law specifically addressing training repayment agreements. Under Colorado’s law, training repayment obligations are only permissible for training that is distinct from normal on-the-job training and repayment is limited to the recovery of reasonable costs, prorated over a maximum of two years. Wyoming also recently passed a law restricting employment contracts that provide for the recovery of “the expense of relocating, educating and training an employee.” The law permits the employer to recover such costs on a sliding scale, with 100% recovery available if employment ends within two years after the employee’s start date. Indiana and Pennsylvania have each enacted more targeted restrictions on repayment agreements which apply only to agreements with certain healthcare workers, reflecting the particular concern that such agreements exacerbate physician shortages and restrict patient access to care.

Key Takeaways and Recommended Actions for Employers

Employers should review their existing offer letters and any employee repayment policies to ensure that any repayment obligations are compliant with applicable state law.
Personnel responsible for negotiating and drafting employment offers and contracts should be trained on these new laws. 
Employers should consult with employment counsel before attempting to collect repayment from a departing employee. Deducting from final wages presents heightened legal risk, particularly in certain jurisdictions.

The WilmerHale Labor and Employment team is available to answer questions and assist employers in drafting compliant repayment obligations.