California's stay-or-pay ban was supposed to apply from January 1, 2026. On September 30, 2026, Governor Newsom signed Assembly Bill 1697, which moves the operative date of AB 692 to January 1, 2027, erases liability for conduct before that date and widens several exceptions. Employers that use sign-on bonuses, relocation packages, training repayment or PTO advances with California workers now have one more drafting cycle before the rules bite. Workers who signed repayment terms in the meantime need to know which rules govern them. Here is what changed, what did not, and how to draft a repayment agreement that will hold up.
What the California stay-or-pay ban covers
A stay-or-pay clause is any contract term that makes a worker pay money because the job ends: a signing bonus returned after an early resignation, relocation costs repayable within a year, a training fee that falls due on the last day. California's ban prohibits three kinds of terms. The first requires a worker to repay a debt to the employer, a training provider or a debt collector when the work relationship ends. The second lets any of them start or resume collection, or end forbearance, upon separation. The third imposes a penalty, fee or cost because the relationship terminates.
The definition of debt does most of the work. It covers employment-related costs, education-related costs and consumer financial products, whether the amount is certain, contingent or voluntarily incurred. A relocation advance called a "loan" is still a debt, and so is a "forgivable" training cost. The statute protects "workers," a term broad enough to reach beyond traditional W-2 employees, so a contractor label is no guarantee that a repayment clause escapes the ban. What the law does not do is outlaw every repayment term. It sets a default prohibition, then carves out narrow exceptions whose conditions must be met exactly.
Legal framework: AB 692 and AB 1697
AB 692, signed on October 13, 2025, added Section 16608 of the Business and Professions Code and Section 926 of the Labor Code. A contract that violates Section 16608 is void under Section 16600, the same rule against restraints on trade that makes most non-compete agreements unenforceable in California. Once the ban applies, a worker, or a representative acting for similarly situated workers, can recover the greater of actual damages or $5,000 per worker, plus injunctive relief and reasonable attorney's fees. Because one template is usually signed by many hires, that fee-shifting provision turns a drafting error into class-wide exposure.
AB 1697 carried an urgency clause and took effect the day it was signed. The California stay-or-pay ban now applies only to contracts entered into on or after January 1, 2027, and the law is inoperative from January 1 through December 31, 2026. The Legislature also barred liability from accruing for acts before January 1, 2027 and made pending claims based on earlier conduct moot. Agreements drafted in late 2025 to meet the original deadline stay valid, and agreements signed during the transition year fall outside Section 16608. That safe harbor does not cure every clause: Section 16600 still governs restraints on trade, and recovering a repayment through a wage deduction remains risky under Labor Code Section 221.
AB 1697 postponed the ban and adjusted its exceptions; it did not repeal it. The bill history and chaptered text are available on the California Legislature's official page for AB 1697.
Relocation and sign-on bonuses after AB 1697
The original bonus exception covered a repayable payment only if it was made "at the outset of employment." AB 1697 deletes that phrase. A discretionary or unearned monetary payment not tied to specific job performance can now qualify whenever it is paid, which brings mid-employment retention bonuses, transfer packages and acquisition incentives back into play. The conditions are cumulative:
- The repayment terms sit in an agreement separate from the main employment contract.
- The worker is told of the right to consult an attorney and gets at least five business days to do so before signing.
- Repayment is interest-free and prorated over a retention period capped at two years from receipt.
- The worker may defer receipt until the retention period ends, with no repayment obligation.
- Only a voluntary resignation or a termination for misconduct under Section 1256 of the Unemployment Insurance Code can trigger repayment.
Relocation needs two extra checks. The deferral option must appear in the document even though a worker who needs money to move will rarely take it. More importantly, when an employer asks a current employee to transfer, the moving costs can be necessary business expenses that Labor Code Section 2802 requires the employer to bear, and Section 2804 makes that duty non-waivable. Those costs generally cannot be shifted back to the worker through a repayment clause, whatever the bonus exception says. A lump sum offered to a new hire who chooses to relocate is the easier case. Either way, use a standalone relocation repayment agreement built for California's revised rules rather than a clawback paragraph in the offer letter, and keep performance pay in a separate employee bonus plan with its own clawback terms, since payments tied to performance fall outside this exception.
Training, PTO advances and the other exceptions
Training repayment is where employers lose the most room. The transferable credential exception is unchanged. It covers tuition for a degree from an accredited institution authorized to operate in California, where the credential is not required for the current job, the terms are in a separate agreement, the amount does not exceed the employer's cost, repayment is prorated without acceleration, and nothing is owed if the employer terminates the worker except for misconduct. Internal onboarding and certifications needed for the job rarely pass that test. A training repayment agreement drafted around the credential rules should start by separating recoverable tuition from everything else.
AB 1697 adds a PTO advance exception. When a worker requests time off beyond what has accrued and then resigns, the employer can recover the advance if the terms were disclosed in a separate document at the time of the request, the obligation does not exceed 40 hours and no interest accrues. The PTO exception never applies when the employer ends the relationship. Broker-dealers, investment advisers and insurance producers get their own exception for recruiting payments to registered or licensed representatives, with interest capped at the applicable federal rate. The government program exception now covers grant-funded recruitment and retention bonuses. Deal teams should note that acquisition retention bonuses can fit the general bonus exception, so the retention letter belongs in the same workstream as the business purchase agreement.
Drafting a compliant repayment agreement on Captain.Legal
Captain.Legal builds the agreement around the exception you rely on. You choose the document that matches the payment, then answer questions on the worker's state, the timing of the payment, the retention period and the events that trigger repayment. For a California worker, the template places the terms in a standalone agreement, inserts the notice of the right to consult counsel with the five-business-day review window, prorates repayment over a period capped at two years, removes interest and adds the deferral option. For workers elsewhere, the questionnaire applies that state's rules, so a multi-state employer keeps one workflow without forcing California terms on a Texas hire. You can edit any clause before downloading, which helps when a candidate negotiates the proration schedule. The document comes in Word and PDF, ready for electronic signature, and your account keeps the version each worker signed. That record is useful evidence if a dispute turns on whether the review period was honored.
Common mistakes California employers make
The first mistake is reading the delay as a cancellation, when the agreements signed in early January 2027 will be the first ones tested. The second is leaving the repayment clause inside the offer letter or employment contract, which fails the separate-agreement condition before anyone reads the substance. We see it constantly in templates inherited from out-of-state parent companies. The third is accelerating repayment so the full bonus falls due on resignation instead of a prorated share.
The fourth is a trigger that covers any termination. Under the bonus exception, a layoff or a dismissal for poor performance cannot trigger repayment, and a "for any reason" clause takes the agreement outside the exception. The fifth is ignoring the review period: handing a retention letter to a new hire on the first morning and collecting a signature before lunch gives a plaintiff an easy argument. The last is interest. Under the bonus and PTO exceptions any interest disqualifies the clause, and even in financial services it cannot exceed the applicable federal rate. Renewals deserve the same care, since the safer reading treats any extension signed after January 1, 2027 as a new contract.
Frequently asked questions
When does the California stay-or-pay ban take effect?
The prohibitions in Business and Professions Code Section 16608 and Labor Code Section 926 apply to contracts entered into on or after January 1, 2027. AB 1697, signed on September 30, 2026 with an urgency clause, moved the date from January 1, 2026 and declared the law inoperative for the whole transition year. No liability can accrue for earlier conduct, and pending claims based on it are moot. Treat January 1, 2027 as the deadline for updating every repayment template used with California workers.
Is a relocation repayment agreement legally valid in California?
Yes, if it fits an exception exactly. A relocation lump sum can qualify under the discretionary payment exception, now available at hire or during employment. The agreement must be separate from the main contract, give five business days to consult counsel, be interest-free, prorate repayment over no more than two years, offer deferral of the payment and limit repayment to resignation or misconduct termination. For transfers requested by the employer, check Labor Code Section 2802 first, because necessary business expenses generally cannot be shifted back to the worker.
How long must an employee have to review a retention or relocation agreement?
At least five business days. Under the discretionary payment exception, the worker must be told in writing of the right to consult an attorney and be given that period before signing, and the financial services exception sets the same window. Count business days rather than calendar days, and allow for public holidays. Keep proof of when the document was delivered, such as a timestamped email or an e-signature audit trail, because the employer will have to show the window was respected if the agreement is challenged.
Can an employer recover advanced PTO when an employee quits?
Yes, within the limits set by AB 1697. Recovery is allowed only after a voluntary resignation, only for time advanced beyond accrued PTO, and only up to 40 hours, with no interest. The terms must be disclosed in a document separate from the employment contract when the worker requests the advance. Those rules belong in a PTO policy covering accrual and advances, backed by a short standalone acknowledgment each time a manager approves an advance.
Do other states restrict stay-or-pay clauses?
Yes, though California's rules remain among the broadest. Colorado limits training repayment through its restrictive covenant statute, C.R.S. 8-2-113, and other states have adopted their own restrictions with different scopes and exceptions. A California-compliant document will not automatically work elsewhere, or the reverse. The trend mirrors non-compete reform, as Washington's move toward a near-total non-compete ban shows, and many employers now review both kinds of clauses in a single pass.
Can I download a California-compliant repayment agreement in Word or PDF?
Yes. Each repayment agreement on Captain.Legal comes in Word and PDF. The Word file lets you or your counsel track changes during negotiation and keep a version history, while the PDF is ready for signature and archiving. Both reflect your questionnaire answers, including the worker's state, so a California hire receives the standalone format, review notice, proration and deferral language the revised statute requires. You can generate updated versions for later hires from your account without starting over.
Does the ban apply to agreements signed before January 1, 2027?
No. Agreements signed in 2025 and during the transition year fall outside Section 16608, and AB 1697 confirms that no liability accrues for that period. They are not automatically enforceable, though: Section 16600 and California's wage deduction rules, including Labor Code Section 221, still apply. Renewals are the trap. A retention agreement extended or amended after January 1, 2027 is safest treated as a new contract, so draft every extension to meet the revised exceptions.