AB 1697: California Amends its Recent Restrictions on 'Stay-or-Pay' Employment Contract Terms

Labor & Employment AlertOverview
As Akin previously reported in our December 11, 2025 alert, a law prohibiting many “stay-or-pay” provisions in employment contracts took effect in California on January 1, 2026. This law, Assembly Bill (AB) 692, revised the California Labor Code and Business and Professions Code to limit employers’ ability to claw back retention bonuses, work-related training or education costs, relocation expenses or other specified payments if a worker who received these payments leaves employment before a set date. AB 692 also created a private right of action allowing affected workers or “worker representatives” to bring claims regarding such “stay-or-pay” provisions. Now, Assembly Bill 1697, which Governor Newsom signed into law on September 30, 2026, amends these restrictions in several notable respects, including extending compliance deadlines, introducing new exceptions for specific industries and payment types, and expanding the range of bonuses and discretionary payments that can be clawed back.
What Has Changed?

The amendment delays the effective date of the previous restrictions by a year, meaning the law’s prohibitions on certain stay-or-pay provisions do not apply to contracts entered before January 1, 2027. As a result of this delay, any pending claims based on violations alleged to have occurred between January 1, 2026 and December 31, 2026, are “moot.”
The following clawbacks are now permitted, subject to specified conditions:

Discretionary payments made during the course of employment. Upon AB 692’s initial passage, the exception permitting employers to claw back “discretionary or unearned monetary payment[s]” applied only to payments made “at the outset of employment.” Notably, the amendment removes the requirement that a discretionary bonus be made “at the outset of employment” to qualify for the repayment exception. Thus, there is no longer a temporal restriction on the types of discretionary or unearned monetary payments employers may claw back. Note that the following conditions must still be met for the clawback to be permissible: (i) any repayment terms are enumerated in an agreement separate from an employment contract, (ii) the worker is informed of their right to consult an attorney and provided at least five business days to do so prior to executing the repayment obligation agreement, (iii) repayment amounts do not accrue interest and are prorated based on the retention period (which may not exceed two years), (iv) the worker is permitted to defer receipt until the end of their retention period and (v) repayment is required only in the event of voluntary separation or worker misconduct.
Advanced paid time off (PTO) payments. The amendment adds an exception allowing employers to recoup advanced PTO payments when a worker voluntarily leaves, provided that (i) the repayment terms are disclosed separately from the primary employment contract, (ii) the repayment obligation does not exceed 40 hours of accrued PTO and (iii) the repayment does not accrue interest.
Certain sign-on and retention bonuses in the finance, securities and insurance industries. The amendment adds a new carveout for securities broker-dealers, insurance producers, investment advisers, and their affiliates that are registered with the U.S. Securities and Exchange Commission (SEC) or Financial Industry Regulatory Authority (FINRA) or licensed by the State of California. These employers may claw back discretionary payments intended to induce a worker to “be affiliated with the employer” or “maintain a relationship with the employer” (i.e., sign-on and retention bonuses). To claw back these sign-on and retention bonuses, the following requirements must be met: (i) the terms of the repayment agreement are set out in an agreement separate from the worker’s employment contract, (ii) the payment was in addition to the worker’s regular compensation, (iii) the employer tells the worker they have the right to consult with an attorney about the agreement and provides them at least five days to do so before signing the repayment agreement and (iv) any interest on the repayment does not exceed the federal income tax interest rate.
Government recruitment and retention bonuses. The amendment adds a carveout for contracts entered “pursuant to a recruitment and retention program funded by a federal, state or local government agency grant that offers recruitment or retention bonuses, if the worker repayment obligations comply with the requirements of the grant and do not exceed the service obligations required by the grant.”



What Has Remained the Same?

The law does not define “discretionary or unearned payments.” Thus, there is still some uncertainty as to precisely which payments qualify for the repayment exception.  
Except for a subset of employers in certain specified industries, employers may not charge interest when clawing back payments.
The law does not specify whether it applies to all workers, or only employees.
The law does not define the scope of “employment contracts,” so it remains unclear whether the law applies to agreements tied to equity compensation or other incentive programs.
The law does not address whether there are any tax consequences for employers for eliminating repayment obligations.

Takeaway for Employers

The amendment meaningfully expands the universe of permissible repayment obligations. In addition to sign-on bonuses, employers may now likely claw back retention bonuses, too, provided the agreements governing these payments meet the law’s requirements.
The original law had no industry-specific exceptions, but the amendment creates new carveouts to the general rule against stay-or-pay provisions, including for certain employers in the financial services industry and government-funded recruitment and retention programs.
Certain employers in the financial services industry may charge interest on qualifying repayments so long as the applicable interest rate does not exceed the Internal Revenue Service’s (IRS) rate for federal income tax purposes.
California employers have until January 1, 2027, to bring their employment contracts into compliance, and any lawsuits filed regarding the law between January 1, 2026, and the passage of the amendment are now moot.
If you have questions about how this law may affect your business, please reach out to a member of Akin’s Labor & Employment team.