New State Laws Void 'Stay-or-Pay' Contracts, Ending a Key Mechanism for Worker Lock-In

For years, a quiet clause buried in employment contracts has kept millions of Americans tethered to jobs they wanted to leave. Known as "stay-or-pay" provisions—or Training Repayment Agreement Provisions (TRAPs)—these clauses require workers to reimburse their employers for training, relocation, or sign-on bonuses if they quit before a specified date. Now, a wave of state legislation is dismantling this system, fundamentally reshaping the balance of power between employers and employees.[3]

The legislative push comes after a high-profile federal effort to ban non-compete agreements collapsed. In 2024, the Federal Trade Commission attempted to issue a sweeping rule that would have banned both non-competes and TRAPs nationwide. However, federal courts blocked the rule, and the FTC ultimately withdrew its appeals in late 2025. With federal action stalled, states have aggressively moved to fill the void, targeting the financial penalties that effectively function as shadow non-competes.[1][3]

California has taken the most decisive action. Assembly Bill 692, which took effect on January 1, 2026, broadly prohibits employers from requiring workers to pay a debt or penalty upon separation from employment. The law applies to a wide range of "quit fees," including retraining costs, replacement-hiring fees, and immigration-related reimbursements. Crucially, the California law establishes a private right of action, allowing affected workers to sue for actual damages or a minimum of $5,000 per violation, plus attorneys' fees.[1][2]

Other states are following suit with their own tailored restrictions. New York's "Trapped at Work Act," which was amended in early 2026, will take effect in February 2027. The New York law prohibits employers from requiring workers to sign "employment promissory notes" that mandate payment if the worker leaves before a stated period. Meanwhile, Connecticut is set to expand its existing stay-or-pay prohibitions to cover employers of all sizes starting October 1, 2026.[1]

The proliferation of TRAPs originally began in highly skilled, high-paying professions, but over the last decade, the practice aggressively expanded into low- and moderate-wage industries. Retail workers, truck drivers, nurses, and even pet groomers found themselves facing thousands of dollars in alleged "training debt" if they attempted to change jobs. Worker advocates argue that these contracts are often coercive, trapping employees in substandard or unsafe working conditions because they simply cannot afford the financial penalty of quitting.[3]

Federal labor regulators have also intensified their scrutiny of the practice. In late 2024, National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo issued a memo declaring that many stay-or-pay provisions are unlawful under the National Labor Relations Act. Abruzzo argued that these financial barriers suppress union organizing and deter employees from advocating for better working conditions, as workers fear that being fired could trigger massive repayment obligations. The NLRB gave employers a 60-day window to cure preexisting unlawful arrangements to avoid prosecution.

The Consumer Financial Protection Bureau (CFPB) has similarly joined the fray, classifying TRAPs as a form of "employer-driven debt." The agency has highlighted how these provisions limit worker mobility, suppress wages across industries, and often involve deceptive fine print that alters the terms of the agreement without the employee's explicit consent. By coordinating with the NLRB and the Department of Justice, the CFPB has signaled a whole-of-government approach to curbing what advocates call modern-day indentured servitude.

From the employer's perspective, stay-or-pay provisions have historically served as a necessary tool to protect investments in human capital. Companies argue that when they spend significant resources training a new hire or paying for their relocation, they need a mechanism to ensure the worker doesn't immediately leave for a competitor, taking that subsidized training with them. Without the ability to recoup these costs, some businesses warn they may have to scale back on-the-job training programs or shift the upfront costs entirely onto the workers.[2][3]

To address these concerns, the new state laws do carve out narrow exceptions. In California, for instance, employers can still require repayment for tuition support if the credential obtained is from an accredited third-party institution, is not required for the employee's current job, and is transferable to other employers. However, the repayment must be prorated over time, cannot exceed the actual cost paid by the employer, and cannot be accelerated upon termination. New York's law includes similar carve-outs for transferable credentials and certain non-educational incentives.[2]

Legal experts are advising corporations to immediately audit their employment contracts, offer letters, and bonus agreements. With California's law already in effect and heavy financial penalties on the line, companies are being urged to redesign their retention strategies. Instead of relying on the "stick" of financial penalties, human resources departments are shifting toward the "carrot" of deferred compensation, incremental vesting of bonuses, and employee stock options to encourage longevity.[2]

The demise of the stay-or-pay contract marks a significant victory for the modern labor movement. By removing the artificial financial barriers that lock workers into their roles, these new state laws are restoring the fundamental right to seek better pay, improved working conditions, and new career opportunities. As more states look to replicate the frameworks established by California and New York, the era of employer-driven training debt appears to be drawing to a close.[3]