California Delays “Stay or Pay” Law to January 1, 2027 and Expands Key Exceptions: An Update on AB 1697

What’s New Under AB 1697

Effective Date Delayed to January 1, 2027 and 2026 Safe Harbor

AB 1697 delays the operative date of the statute’s prohibitions by one full year. The law now applies to “contracts entered into on or after January 1, 2027,” and is “inoperative” from January 1, 2026, through December 31, 2026. The amendment expressly “prevent[s] the accrual of liability” under AB 692 for acts occurring before January 1, 2027, and renders “moot” any pending claim based on a violation alleged to have occurred beforehand. This effectively creates a safe harbor for the entirety of 2026.

Exemption #4: Discretionary Bonuses—Removal of the “Outset of Employment” Limitation

One of the most consequential substantive amendments concerns the exemption for discretionary monetary payments. Under AB 692, the exemption applied only to repayable bonuses made “at the outset of employment” (e.g., sign-on bonuses), which suggested that mid-employment retention bonuses with exit-triggered repayment obligations were not permissible under the exception.

AB 1697 eliminates the “outset of employment” requirement. The amended statute exempts “a contract for the receipt of a discretionary or unearned monetary payment, including a financial bonus, that is not tied to specific job performance,” broadening permissible repayment arrangements to include sign-on, post-hire retention, mid-employment recruiting, and restructuring and acquisition incentives.

The exemption is subject to all of the following conditions:

• The repayment terms must be in a separate agreement from the primary employment contract.
• The worker must be notified of the right to consult counsel and must be provided at least five business days to obtain advice before signing the agreement.
• Any early separation repayment obligation must be interest-free and prorated over the remaining retention period, capped at two years from receipt of the payment.
• The worker must have the option to defer receipt of the payment until the retention period is fully served, without any repayment obligation.
• Early separation may trigger repayment only if the separation was at the worker’s sole election (e.g., a voluntary resignation) or upon employer termination for “misconduct” as defined in Unemployment Insurance Code Section 1256.

Exemption #6: Financial Services Recruiting and Retention Payments (New)

AB 1697 adds a new, industry-specific exemption for financial services entities. The exemption covers contracts between a securities broker-dealer, insurance producer, or investment adviser, including their affiliates, agents or representatives who are:

• registered with the Securities and Exchange Commission (“SEC”) or the Financial Industry Regulatory Authority (“FINRA”);
• licensed by the State of California under Corporations Code Chapter 2 (commencing with Section 25210) or Chapter 3 (commencing with Section 25230) of Part 3 of Division 1 of Title 4 (i.e., broker-dealer agents and investment adviser representatives); or
• licensed under Insurance Code Section 1626.

The exemption covers “a discretionary or unearned monetary payment from the employer that is an inducement for the worker to be affiliated with the employer or agreeing to maintain a relationship with the employer.” Unlike the general discretionary-bonus exemption, it does not require deferral, a two-year proration cap, or a resignation/misconduct-only trigger for early separation. To qualify, the following conditions must be met:

• The repayment terms must be documented in a standalone agreement separate from the primary employment contract.
• The payment must be “in addition to compensation that would otherwise be payable to the worker in connection with their employment.”
• The worker must be given notice of the right to consult counsel and at least five business days to obtain advice before signing.
• If post-separation interest accrues on an outstanding obligation, the interest rate may not exceed the IRS-published applicable federal rate (“AFR”).

Exemption #7: Paid Time Off Advances (New)

AB 1697 adds a new exemption permitting employers to recover certain advances of PTO when an employee voluntarily separates before earning the advanced leave. The statute exempts “[a] repayment obligation arising from voluntary separation of employment related to an advanced payment made by the employer for paid time off in excess of a worker’s accrued paid time off,” if:

• The repayment terms must be clearly disclosed to the worker in a document separate from the primary employment contract at the time the worker requests the advance.
• The repayment obligation may not exceed 40 hours of accrued paid time off.
• The repayment obligation may not be subject to interest accrual.

Importantly, this exemption applies only to voluntary separations.

Expanded Government Program Exemption

AB 1697 expands the existing government program exemption to cover “a contract entered into pursuant to a recruitment and retention program funded by a federal, state, or local government agency grant that offers recruitment or retention bonuses,” if the repayment obligations comply with the grant and do not exceed its required service obligations. Employers using these programs should confirm compliance with the grant terms.

What Remains Unchanged

AB 1697 does not alter the fundamental structure of AB 692’s prohibitions. For contracts entered into on or after January 1, 2027, the statute continues to prohibit three categories of contractual provisions in employment contracts and related agreements:

• Debt Repayment Upon Termination: Contract terms that require a worker to pay an employer, training provider, or debt collector for a “debt” upon termination of employment or a work relationship.
• Collection or Forbearance Provisions: Contract terms that authorize an employer, training provider, or debt collector to resume or initiate collection of, or end forbearance on, a debt upon termination.
• Penalties, Fees, or Costs: Contract terms that “impose[] any penalty, fee, or cost on a worker” upon termination.

The broad statutory definitions also remain unchanged, as do the following exemptions, which remain operative and substantively unchanged:

• Exemption #1: Government Loan Repayment and Forgiveness Programs. The statute continues to exempt contracts “entered into under any loan repayment assistance program or loan forgiveness program provided by a federal, state, or local governmental agency.”
• Exemption #2: Repayment of Tuition for Transferable Credentials. The exemption for contracts related to the repayment of tuition for a “transferable credential”—i.e., a degree from an accredited third-party institution authorized in California that is not required for the worker’s current job and is useful beyond the current employer—remains unchanged, along with its detailed conditions.
• Exemption #3: Apprenticeship Programs. The exemption for contracts related to enrollment in apprenticeship programs approved by the California Division of Apprenticeship Standards remains unchanged.
• Exemption #5: Residential Property Transactions. The exemption for contracts related to the lease, financing, or purchase of residential property, including under the California Residential Mortgage Lending Act, remains unchanged.

The statute’s remedies also remain unchanged. A contract violating Section 16608 is void under Section 16600 and contrary to public policy. A worker or a worker’s representative may bring a civil action on behalf of the worker and similarly situated persons and may recover the greater of actual damages or $5,000 per worker, plus injunctive relief and reasonable attorneys’ fees and costs.

Updated Practical Recommendations for California Employers

Employers should use the 2026 transition period to prepare for January 1, 2027:

• Review and revise standard form templates that may contain repayment or clawback provisions triggered by termination of employment. Employers with collective bargaining agreements should work with labor counsel toward compliance before January 1, 2027.
• Reassess arrangements in light of new exemptions. Employers that revised agreements for AB 692 should revisit them—for example, mid-employment retention bonuses may now be used if all statutory conditions are satisfied.
• Financial services firms should assess eligibility. Securities broker-dealers, insurance producers, and investment advisers should evaluate recruiting and retention arrangements and conform forgivable loan, transition-compensation, and promissory note templates to the statutory requirements, including the AFR interest rate cap.
• Evaluate PTO advance policies. Review PTO advance programs against the new conditions (separate disclosure, 40-hour cap, no interest, voluntary separation only).
• Monitor developments. Monitor any Labor Commissioner guidance, further legislative amendments, and case law interpreting the statute.