A Reprieve, Not a Reversal: California Revises Its Stay-or-Pay Law

California employers that spent much of 2026 revising their sign-on bonuses, retention agreements, and other compensation arrangements in response to Assembly Bill 692 (AB 692) now face a somewhat unexpected development. On September 30, 2026, Governor Gavin Newsom signed Assembly Bill 1697 (AB 1697), postponing the application of California’s new restrictions on employment-related repayment obligations and expanding several statutory exceptions.

For employers that have already modified their agreements, the legislation raises an important practical question: should those changes remain in place, or does the amended law permit a different approach?

The answer depends on when the agreement was executed, how the compensation arrangement is structured, and whether the employer wishes to preserve or reintroduce repayment obligations going forward.

What AB 1697 Changes — and What It Does Not

As originally enacted, AB 692 added Section 16608 to the California Business and Professions Code and Section 926 to the Labor Code, generally prohibiting contracts entered into on or after January 1, 2026, from requiring workers to repay debts, incur penalties, or assume other financial obligations because their employment or work relationship ends.

The law particularly affected traditional sign-on and retention bonus arrangements that required employees to repay an up-front payment if they left before completing a specified service period. It also reached certain training reimbursement agreements, relocation expenses, and other repayment obligations tied to separation.

AB 1697 makes three significant changes to this framework. First, it postpones the restrictions’ applicability date to January 1, 2027. Second, it expands the exception for certain discretionary or unearned monetary payments by removing the requirement that those payments occur at the outset of employment. Third, it establishes additional exceptions for specified government-funded recruitment and retention programs, certain financial services arrangements, and limited advances of paid time off.

Importantly, however, AB 1697 does not eliminate the underlying prohibition or its enforcement provisions. For covered agreements entered into beginning January 1, 2027, violations may still result in an unenforceable contract and civil liability, including actual damages or $5,000 per worker, whichever is greater, together with injunctive relief and reasonable attorney fees and costs.

A One-Year Reprieve for Agreements Entered Into During 2026

AB 1697’s most immediate effect is to change which agreements are subject to the new statutory restrictions. Whereas AB 692 originally applied to contracts entered into on or after January 1, 2026, the amended law applies to contracts entered into on or after January 1, 2027.

This distinction is significant. AB 1697 does not simply give employers another year to revise agreements already executed during 2026. Rather, agreements entered into before January 1, 2027, fall outside AB 692’s new statutory prohibition, even if an employee’s subsequent separation or repayment obligation occurs after that date. The amendment also makes the original statutory provisions inoperative throughout 2026 and eliminates liability arising under those provisions during the transition period.

For employers that continued using traditional repayment agreements during 2026, this provides meaningful protection under AB 692. Importantly, the same treatment applies to employers that already revised their agreements to comply with AB 692. Although those agreements remain binding according to their terms, they are no longer subject to AB 692’s statutory requirements. Thus, employers need not retroactively modify agreements executed during 2026 to satisfy AB 692, regardless of whether those agreements were originally drafted with the statute in mind.

The reprieve is not, however, a blanket authorization for all repayment provisions. California’s existing restrictions on employee mobility, employer reimbursement obligations, and other applicable laws continue to govern agreements regardless of when they were executed.

Expanded Flexibility for Retention and Other Bonus Arrangements

Perhaps the most consequential substantive amendment is AB 1697’s expansion of the exception for certain discretionary or unearned monetary payments, including financial bonuses.

Under AB 692’s original framework, this exception was limited to qualifying payments made “at the outset of employment.” That restriction presented challenges for employers seeking to provide retention bonuses, relocation incentives, or similar payments to existing employees rather than new hires.

AB 1697 removes that limitation. As a result, qualifying bonuses offered during an existing employment relationship may now fall within the exception, giving employers greater flexibility to structure retention incentives without necessarily abandoning up-front payments.

However, the amendment does not eliminate the exception’s remaining safeguards. To qualify, the payment must be discretionary or unearned and cannot be tied to specific job performance. The agreement must also satisfy several requirements

• Any repayment obligation must be set forth in an agreement separate from the primary employment contract.
• The employee must be notified of the right to consult counsel and provided at least five business days to obtain legal advice before executing the agreement.

• Repayment must be interest-free and prorated based on the remaining portion of a retention period not exceeding two years from receipt of payment.

• The employee must have the option to defer receipt of the payment until completing the retention period, thereby avoiding any repayment obligation.

• Repayment may be triggered only by the employee’s voluntary separation or an employer-initiated termination for misconduct as defined under California Unemployment Insurance Code Section 1256.

These conditions remain cumulative. Merely labeling a payment as a retention bonus, providing for prorated repayment, or incorporating the terms into a separate agreement will not independently satisfy the exception.

AB 1697 also creates additional, narrowly tailored exceptions, including for certain government grant-funded recruitment and retention programs, qualifying arrangements involving registered or licensed financial services and insurance professionals, and repayment of limited paid-time-off advances following voluntary separation. These exceptions provide additional flexibility but are subject to their own statutory requirements.

What Should Employers Do With Agreements Already Revised Under AB 692?

For employers that spent much of 2026 modifying their compensation arrangements, AB 1697 presents an opportunity to reassess those changes rather than automatically reverse them. Employers that eliminated repayment provisions or adopted completion bonuses and installment-based retention payments may find that those structures continue to serve their recruiting and retention objectives. Others may wish to reconsider up-front incentives in light of the expanded statutory exceptions.

The immediate priority should be reviewing existing offer letters, sign-on bonus agreements, retention arrangements, relocation incentives, training repayment agreements, and related compensation policies. Employers should distinguish between agreements already executed and templates intended for future use, identify any repayment provisions that will require modification for agreements entered into beginning January 1, 2027, and determine whether the revised exceptions provide additional flexibility.

Ultimately, AB 1697 provides employers with additional time and options, but does not reverse California’s broader restrictions on employment-related repayment obligations. Employers that use this opportunity to evaluate their compensation strategies and update their agreements prospectively will be better positioned to preserve effective recruiting and retention incentives while managing compliance risks under the revised law