Employers Get More Time to Prepare for California’s Stay-or-Pay Ban

California enacted a ban on “stay-or-pay” agreements last year as part of a growing trend among states to address employee mobility. The ban includes training repayment agreements but carves out some of the most common arrangements, like tuition reimbursement and retention bonus repayment, so long as employers follow certain guidelines. While the law was supposed to apply to new contracts starting at the beginning of this year, Governor Newsom just signed a bill yesterday pushing the effective date to contracts entered on or after Jan. 1, 2027, and adding some new exceptions. The delay provides a more workable timeline for employers and gives more flexibility through broadened and additional exceptions. Here’s what you need to know and four things you can do now to prepare.

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How We Got Here

Last year, Governor Newsom signed Assembly Bill 692 (AB 692) into law, which targets “fees that penalize workers who choose to exercise their freedom of employment.” AB 692 bars employers from requiring a worker, as a condition of employment or a work relationship, to sign a contract that:

• Stipulates that a worker must pay an employer, training provider, or debt collector for a debt if the worker’s employment or work relationship with a specific employer terminates.
• Authorizes the employer, training provider, or debt collector to resume or initiate collection of or end forbearance on a debt if the worker’s employment or work relationship with a specific employer terminates.
• Imposes any penalty, fee, or cost on a worker if the worker’s employment or work relationship with a specific employer terminates.

The bill defines many of these key terms:

• For example, “worker” includes, but is not limited to, employees or prospective employees. Before lawmakers passed the bill, they removed references to independent contractors, freelance workers, externs, interns, apprentices, and sole proprietors, which appeared in earlier versions.
• “Penalty, fee, or cost” is defined to include a replacement hire fee, retraining fee, replacement fee, quit fee, reimbursement for immigration or visa-related costs, liquidated damages, lost goodwill, and lost profit.

Key Exceptions

Despite the general prohibition, the bill allows for contracts related to tuition cost repayment for a “transferable credential,” so long as certain criteria are met. Another exception applies to sign-on bonuses with a built-in “stay” incentive, through which the employee would be required to pay back all or a portion of the bonus if they left before a specified period. 

Legal Actions

Workers subjected to a violation can sue to recover their actual damages or $5,000, whichever is greater, along with injunctive relief and reasonable attorneys’ fees and costs.

What’s Changing Now

The new bill, Assembly Bill 1697 (AB 1697), was signed into law yesterday and does these main things:

1. Delays implementation until Jan. 1, 2027. AB 692’s prohibitions were originally set to apply to contracts entered on or after Jan. 1, 2026. AB 1697 pushes that date back a year, giving employers additional time to restructure covered contracts and providing a transition period for employers operating under a collective bargaining agreement to comply.

2. Shields employers from liability for 2026. AB 1697 also states that the provisions of the law enacted under AB 692 “shall be inoperative from Jan. 1, 2026 to Dec. 31, 2026, inclusive.” The Legislature specifically declared its intent that this provision render “moot” any alleged violation of the previous law. 

3. Broadens exception for bonus payments. AB 692 provided an exception for repayment obligations arising from a discretionary payment made “at the outset of employment.” AB 1697 removes the requirement that the payment be made “at the outset of employment.” This change broadens the exception beyond signing bonuses, to apply throughout employment, to include in-term retention or other bonuses, subject to the remaining conditions.

4. Establishes new exceptions to the stay-or-pay ban, in addition to the existing ones enacted with AB 692. The following are now carved out, too:

• Contracts related to recruitment and retention programs funded by a federal, state, or local grant.
• Repayment obligations arising from a voluntary separation of employment related to advance PTO payments in excess of a worker’s paid time off.
• Specified affiliation contracts involving securities broker-dealers, insurance producers, or investment advisers.

What Should Employers Do Now?

Employers that were working to restructure tuition reimbursement, retention bonus programs, and other agreements to comply with new guardrails and restrictions now have a little more time, but the new effective date will be here soon. Consider taking these four steps now to be ready by the new year:

1. Review the new exceptions for grant-funded programs, certain advance PTO repayment obligations, and specified affiliation contracts and determine whether any of your related agreements are now permissible exceptions to the ban.

2. Fine-tune agreements for tuition reimbursement and retention bonuses to ensure new contracts fit within the statutory exceptions by Jan. 1.

3. Don’t amend or revoke existing agreements. The bill applies prospectively to new agreements entered on or after Jan. 1, 2027 and shields liability for agreements entered in 2026.

4. Track changes and continue to protect your business interests. California continues to limit restrictive covenants, making it essential to regularly review and audit policies meant to guard trade secrets and other important business interests. Work with counsel to ensure compliance as you build policies and practices to protect your most valuable assets to the greatest extent possible.

Jonathan Crook is an attorney with Fisher Phillips in Charlotte, N.C. Sean Kingston is an attorney with Fisher Phillips in Irvine, Calif. © 2026 Fisher Phillips. All rights reserved. Reposted with permission.