California's Stay-or-Pay Ban Takes Effect January 1, 2027: What AB 692 and AB 1697 Require

Agreements that make a worker repay a bonus, tuition or other cost when employment ends are unlawful in California if signed on or after January 1, 2027. The rule comes from AB 692 (Business and Professions Code § 16608; Labor Code § 926), as amended by AB 1697 (Ch. 889, Stats. 2026), an urgency statute signed September 30, 2026. AB 1697 delayed the start date and rewrote several exceptions.

What is prohibited

For covered contracts, an employer may not include in an employment contract, or require as a condition of employment, a term that does any of the following when the work relationship ends:

• requires the worker to pay the employer, a training provider or a debt collector a debt;
• authorizes collection of a debt or ends forbearance on one; or
• imposes any penalty, fee or cost on the worker.

"Debt" covers employment-related costs, whether certain or contingent. "Penalty, fee, or cost" expressly includes replacement hire fees, retraining fees, quit fees, visa reimbursement, liquidated damages, lost goodwill and lost profit. The statute reaches parent companies, affiliates and third-party agents of the employer, and it protects prospective employees and freelance workers, not just current employees.

The timeline

The original law applied to contracts entered into on or after January 1, 2026. AB 1697 moved that date to January 1, 2027, made the 2026 version inoperative, and declared that pending claims based on 2026 conduct are moot. Agreements signed in 2026 fall outside AB 692, though other law still applies to them. Any agreement signed on or after January 1, 2027 is covered, including new bonus or tuition agreements with existing employees.

The exposure

A violation carries the greater of actual damages or $5,000 per worker, plus injunctive relief and attorney's fees. Workers may sue on behalf of themselves and others similarly situated. A noncompliant template signed across a workforce means class-wide statutory damages from the first signature.

The exceptions

The exceptions are narrow, and each condition must be met.

• Government programs. Loan repayment and forgiveness programs, and recruitment and retention programs funded by a government grant, where repayment complies with the grant and does not exceed its service obligations.
• Tuition for a transferable credential. The agreement must be separate from employment, the credential cannot be a condition of employment, and the repayment amount must be fixed in advance and capped at the employer's cost. Repayment must be prorated with no acceleration on separation, and nothing is owed if the worker is terminated, except for misconduct.
• Apprenticeship programs approved by the Division of Apprenticeship Standards.
• Discretionary or unearned payments not tied to specific job performance, including bonuses. AB 1697 removed the original "at the outset of employment" limit, so retention and other later payments can qualify. All five conditions apply:
• • the repayment terms are in a separate agreement;
  • the worker gets written notice of the right to consult an attorney and at least five business days to do so;
  • there is no interest, repayment is prorated, and the retention period is two years or less;
  • the worker has the option to defer the payment until the end of a fully served retention period with no repayment obligation; and
  • separation was at the worker's election, or the employer's election for misconduct.
• Residential property lease, financing and purchase contracts.
• Financial-services inducement payments. Limited to agents and representatives of securities broker-dealers, insurance producers and investment advisers (and their affiliates) who hold the specified SEC, FINRA or California registrations or licenses. It has its own conditions, including a separate agreement, attorney notice with five business days, and post-separation interest capped at the IRS applicable federal rate. Employers outside those industries cannot use this exception.
• Advanced PTO. Repayment is allowed only on voluntary separation. The terms must be disclosed separately when the worker requests the advance, repayment is capped at 40 hours, and no interest may accrue.

Example. An employer pays a $12,000 retention bonus with a 24-month retention period. The worker resigns after nine months, leaving 15 months, so a prorated repayment obligation is $7,500 (15/24 of $12,000). That math works only if the other conditions are met. If the same worker is laid off at month nine and the agreement still demands repayment, the term falls outside the exception because separation was not at the worker's election or for misconduct.

No exception for relocation or training costs

No exception is written for relocation repayment or for on-the-job training costs. Whether a relocation payment can fit the discretionary-payment exception is an open question, and the safer assumption is that relocation clawbacks signed on or after January 1, 2027 are exposed.

The wage-and-hour layer

AB 692 does not displace other law. Section 16608(d) preserves Labor Code § 2802 (expense reimbursement), the ABC test in Labor Code § 2775 et seq., and the Unfair Competition Law.

Separately, recovering a repayment obligation out of a worker's pay triggers the Labor Code's wage protections, whether or not the agreement fits an AB 692 exception. Section 221 makes it unlawful for an employer to collect or receive from an employee any part of wages already paid. Section 224 permits deductions only when required by law or expressly authorized in writing, and not where the deduction amounts to a rebate or deduction from the standard wage.

On separation, §§ 201 and 202 require earned wages to be paid immediately on discharge, or within 72 hours of a resignation (at the time of quitting if 72 hours' notice was given, absent a written contract for a definite period). Section 203 continues wages as a penalty for up to 30 days when the failure to pay is willful. In Barnhill v. Robert Saunders & Co. (1981) 125 Cal.App.3d 1, the court held that an employer may not set off an employee's debt against final wages. An offset against a final check therefore risks both an unlawful deduction and waiting time penalties. Whether a given payment is a wage or a debt is fact-specific.

What to do before January 1

1. Inventory every agreement with a repayment, forfeiture, fee or cost term: signing and retention bonuses, tuition, relocation, training, equipment, PTO advances.
2. Match each to an exception and test every condition, not just the headline.
3. Rebuild templates for use on or after January 1, 2027. Separate agreements, the attorney-notice and five-business-day language, proration schedules and the deferral option should be built in.
4. Check how repayment is collected. Payroll deductions and final-check offsets need separate review.

Repayment clauses and payroll deductions are fact-specific. Contact Wage Counsel Group to have your agreements and payroll records reviewed before January 1.

This post is for general informational purposes only and is not legal advice. It does not create an attorney-client relationship. Laws change, and their application depends on the facts of each agreement. Current as of October 3, 2026.