California likes to promote employee mobility and last year took steps to prevent “stay or pay” provisions in the employment context. Accordingly, AB 692 prohibited certain contracts that required a worker to repay an employer when the employment relationship or work ended.
As originally enacted, the law applied to contracts entered into on or after January 1, 2026. As a result many employers updated their offer letter templates, employment agreement templates, terms for signing bonuses, relocation benefits, tuition reimbursement programs, and even promissory notes to prevent “claw-back” of funds advanced to employees for specified purposes, and to ensure compliance with AB 692.
As originally drafted, the law provided an exception in the following two circumstances:
- Transferable credential tuition costs; and
- Discretionary monetary bonuses at the outset of employment (such as a sign-on bonus or a relocation payment) that were not tied to specific job performance.
These exceptions required specific language in a separate agreement that provided:
- The worker had to be given five days to consult with counsel before signing.
- Repayment obligations had to be prorated for a period of not more than 2 years and without interest.
- The worker had to be given the option to defer payment until retention period ended (to avoid the claw-back).
- Separation was voluntary or due to the employee’s misconduct.
Since the law was enacted, industry groups for employers, healthcare and financial services lobbied for changes, resulting in a follow-up bill (AB 1697) signed into law on September 30, 2026 as an urgency statute, making the following changes effective immediately:
- The law only applies to contracts entered into on or after January 1, 2027. Any actions based on the prior version of the law are now moot, making 2026 a safe harbor period.
- The exception can now apply to discretionary monetary bonuses during employment (not just upon hire).
- A new exception for the financial services industry permits certain retention bonuses during employment for agreements between a securities broker-dealer, insurance producer, or investment adviser (including their affiliates, agents or representatives). The same specific language outlined above applies to this new exception.
- A new exception covers government-grant related and retention bonuses .
- A new provision allows an employer to recoup up to 40 hours of advanced paid time off (PTO), provided the employee separates voluntarily and the PTO repayment obligation is set out in a separate disclosure (with no interest).
The bill is dense, the details matter, and questions remain unanswered. Accordingly, employers should:
- Inventory any possible programs that may include claw-back language, such as discretionary bonuses, retention bonuses, relocation bonuses, promissory notes, training repayment, and tuition reimbursement.
- Review with counsel to see if any exemptions apply, and if so, add the proper language in a separate agreement or addendum.
- Update applicable policies and templates for 2027.
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