California employers now have a little more time and flexibility to comply with California’s 2025 law that banned or restricted most employment-related “stay-or-pay” provisions. The new legislation delays the law’s compliance deadline such that the restrictions no longer apply to contracts entered into between January 1, 2026 and January 1, 2027. While these changes leave the law’s core requirements intact, they add new exceptions and expand existing ones.

Background and AB 692

“Stay-or-pay” provisions require workers to repay signing and retention bonuses, training and tuition reimbursement, and similar compensation, or to pay a penalty, if their employment ends before a certain date.

AB 692, which took effect on January 1, 2026, effectively banned stay-or-pay agreements unless narrow exceptions applied. Under one such exception, employers can still enforce repayment terms, but only if those terms are contained in a separate written agreement, the worker receives notice of the right to consult an attorney, and the worker has at least five business days to review the agreement. Repayment must be interest-free and prorated over a retention period of no more than two years. The worker must also have the option to defer receipt of the payment until the retention period ends, and repayment may be triggered only by resignation or termination for “misconduct,” as defined by statute. Violations of AB 692 expose employers to the greater of actual damages or $5,000 per worker, in addition to injunctive relief and attorneys’ fees.

As originally enacted, AB 692 applied to agreements entered into on or after January 1, 2026.

However, on September 30, 2026, Governor Gavin Newsom signed Assembly Bill (AB) 1697, which took effect immediately. Most significantly, AB 1697 delays AB 692’s application so that it reaches only agreements entered into after January 1, 2027. AB 1697 also adds and expands several exceptions, discussed below.

Expanded and New Exceptions

AB 1697 preserves other existing exceptions under AB 692, including qualifying optional tuition programs and approved apprenticeship programs, while expanding or adding exceptions for the following arrangements, provided the provision still meets the law’s other requirements as described above:

Payments made during employment. AB 692’s primary exceptions applied only to payments or bonuses made “at the outset of employment.” AB 1697 extends those exceptions to qualifying payments made during the course of employment, such as mid-employment retention bonuses.

Government-funded recruitment and retention bonuses. Employers may require repayment of bonuses offered through programs funded by federal, state, or local government grants. The repayment obligation must comply with the applicable grant’s requirements and cannot exceed the service obligation imposed by the grant.

Advanced paid time off. Employers may recover paid time off (PTO) advanced beyond a worker’s accrued balance following a voluntary separation. The employer must provide a separate, clear written disclosure when the worker requests the advance. Recovery is limited to 40 hours.

Financial services affiliation payments. Certain broker-dealers, insurance producers, investment advisers, and their affiliates may impose repayment terms on inducement payments made to qualifying registered or licensed representatives. The payment must be additional to otherwise payable compensation. Post-separation interest cannot exceed the applicable federal rate. Unlike the general bonus exception, this exception does not require proration, a deferral option, a two-year limit, or a particular reason for separation.

Employer Takeaway

California employers offering signing and retention bonuses, tuition and training reimbursement, and similar benefits should use the remainder of 2026 to inventory repayment provisions in offer letters, bonus agreements, tuition and training arrangements, PTO policies, relocation packages, and forgivable loans. Because the exceptions are narrowly defined, employers should not assume that characterizing an obligation as a “repayment” makes it enforceable. Employers with questions about how AB 692 and AB 1697 affect their existing or planned agreements should contact a Nelson Mullins attorney.

This publication is for informational purposes only and does not constitute legal advice.