Employers Beware: California Has Expanded the List of Unlawful Contracts with Employees
Published: November 18, 2025
On October 13, 2025 Governor Newsom signed into law Assembly Bill (“AB”) 692 which is another law allegedly aimed at preventing contracts deemed to be a restraint on trade. Employers should be aware of the new law as it could significantly impact their ability to enter into, and/or enforce, certain contracts with employees for the repayment of a debt.
- Business and Professions Code Section 16608.
AB 692 adds section 16608 to the California’s Business and Professions (“B&P”) Code and makes it a part of California’s larger statutory scheme against the unlawful restraint on a person’s right to engage in a lawful profession, trade, or business.
What Is Prohibited under B&P Section 16608?
B&P section 16608 provides that on or after January 1, 2026, it shall be 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:
- 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.
- 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.
- Imposes any penalty, fee, or cost on a worker if the worker’s employment or work relationship with a specific employer terminates.
Under the new law, “Debt” is defined as “money, personal property, or their equivalent that is due or owing or alleged to be due or owing from a natural person to another person, including, but not limited to, for employment-related costs, education-related costs, or a consumer financial product or service, regardless of whether the debt is certain, contingent, or incurred voluntarily.”
Exceptions to the Prohibitions under B&P Section 16608.
There are some exceptions to the prohibitions listed above. B&P section 16608 states expressly that the law does not apply to the following types of contracts:
- A contract entered into under any loan repayment assistance program or loan forgiveness program provided by a federal, state, or local governmental agency.
- A contract related to the repayment of the cost of tuition for a transferable credential provided such contract meets all of the following requirements: (i) it is offered separately from any contract for employment; (ii) it does not require obtaining the transferable credential as a condition of employment; (iii) it 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; (iv) it 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; and (v) it does not require repayment to the employer by the worker if the worker is terminated, except if the worker is terminated for misconduct.
- A contract related to enrollment in an apprenticeship program approved by the CA Division of Apprenticeship Standards.
- 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 such contract meets all of the following conditions: (i) the terms of any repayment obligation are set forth in a separate agreement from the primary employment contract; (ii) 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; (iii) 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; (iv) the worker has an option to defer receipt of the payment to the end of a fully served retention period without any repayment obligation; (v) 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.
- A contract related to the lease, financing, or purchase of residential property, including, but not limited to, a contract pursuant to the CA Residential Mortgage Lending Act.
- Labor Code section 926.
AB 692 also adds section 926 to the CA Labor Code which states that any contract or contract term after January 1, 2026 that violates B&P section 16608 is void as contrary to public policy, and an aggrieved party has the following remedies in addition to any remedies otherwise available under the B&P Code.
- A worker who has been subjected to the conduct prohibited by B&P section 16608, or a worker representative, may bring a civil action on behalf of that worker, other persons similarly situated, or both, in any court of competent jurisdiction.
- Any person found liable for a violation shall be liable for actual damages sustained by the worker or workers on whose behalf the case is brought, or $5,000.00 per worker, whichever is greater, in addition to injunctive relief, and reasonable attorney’s fees and costs.