California has enacted Assembly Bill 1697, an urgency measure that substantially revises the state’s recently enacted restrictions on so-called “stay-or-pay” provisions in employment agreements. The law immediately took effect as an urgency statute, delays the applicability of the underlying restrictions until January 1, 2027, and creates several significant new exceptions for certain recruitment bonuses, retention incentives, financial-services affiliation agreements, and advanced paid time off arrangements.
Background
California previously enacted legislation prohibiting employers from including certain provisions in employment contracts that require workers to repay debts, fees, costs, penalties, or similar obligations when their employment ends. These provisions were aimed at preventing “debt trap” or “quit fee” arrangements that could discourage workers from changing jobs.
AB 1697 revises that framework by delaying implementation and expanding the list of permissible repayment arrangements.
Restrictions Delayed Until January 1, 2027
The most significant change made by AB 1697 is the delayed applicability date.
Under the amended law, the stay-or-pay restrictions apply only to contracts entered into on or after January 1, 2027, rather than January 1, 2026.
The Legislature expressly stated that the delay is intended to:
- Give employers additional time to revise employment agreements;
- Allow employers to restructure contracts to avoid unlawful debt-trap provisions; and
- Provide employers operating under collective bargaining agreements additional time to come into compliance.
The legislation also provides that any claim based on alleged violations occurring between January 1, 2026, and the effective date of AB 1697 is moot.
General Prohibition Remains
Beginning January 1, 2027, employers generally may not require workers to enter contracts that:
- Require repayment of a debt because employment ends;
- Permit debt collection activity because employment ends;
- Restart collection efforts because employment ends; or
- Impose a penalty, fee, or cost when a worker leaves employment.
The statute continues to broadly define prohibited penalties and fees to include items such as quit fees, replacement-hire fees, retraining fees, liquidated damages, lost goodwill claims, lost profit claims, and reimbursement of immigration-related costs.
New Exception for Government-Funded Recruitment and Retention Programs
AB 1697 creates a new exception allowing certain repayment obligations tied to government-funded recruitment and retention incentives.
The stay-or-pay restrictions do not apply to contracts entered into pursuant to a recruitment and retention program funded through a federal, state, or local government grant that offers recruitment or retention bonuses, provided:
- The repayment obligation complies with the grant requirements; and
- The obligation does not exceed the service commitment required under the grant.
This exception may be particularly relevant to healthcare, education, public service, and other sectors that frequently use grant-funded workforce incentive programs.
Existing Educational Repayment Exception Retained
The law continues to permit certain tuition repayment arrangements involving a transferable credential, provided strict statutory requirements are met.
Among other conditions:
- The agreement must be separate from the employment agreement;
- The credential cannot be required as a condition of employment;
- Repayment cannot exceed the employer’s actual cost;
- Repayment must be prorated over the service period; and
- Repayment generally cannot be required when the employee is terminated, unless termination is for misconduct.
Apprenticeship Program Exception Retained
AB 1697 continues to permit agreements related to apprenticeship programs approved by the Division of Apprenticeship Standards.
Exception for Recruitment and Retention Bonuses
The legislation preserves and clarifies an exception for certain discretionary or unearned monetary payments, including some recruitment and retention bonuses.
To qualify for the exception:
- The repayment obligation must appear in a separate agreement from the primary employment agreement;
- Employees must be informed of their right to consult legal counsel;
- Employees must be given at least five business days to obtain legal advice before signing;
- Repayment obligations must be prorated based on the remaining retention period;
- The retention period generally may not exceed two years; and
- Repayment generally may be required only where the employee voluntarily separates or is terminated for misconduct.
The law also requires employees to have the option to defer receipt of the payment until completion of the retention period and avoid any repayment obligation altogether.
New Exception for Financial Services Affiliation Agreements
AB 1697 adds a significant new industry-specific exception for certain financial-services arrangements.
The stay-or-pay prohibitions do not apply to certain agreements involving discretionary or unearned monetary payments intended to induce a worker to affiliate with, or remain affiliated with, an employer, provided specified requirements are met.
The exception applies only to agreements involving:
- Securities broker-dealers;
- Insurance producers;
- Investment advisers; and
- Their affiliates,
and only where the worker is a registered or licensed representative meeting specified federal or California licensing requirements.
Additional protections apply, including:
- Separate written agreements;
- Notice of the right to consult an attorney;
- A minimum five-business-day review period;
- Limits on post-separation interest charges; and
- Requirements that the payment be in addition to ordinary compensation.
This provision appears designed to preserve certain recruiting and transition-payment practices common in the financial-services industry.
New Exception for Advanced Paid Time Off
AB 1697 also creates a new exception allowing employers to recover certain advances of paid time off following a voluntary separation.
The exception applies when:
- The worker requests payment for paid time off beyond the worker’s accrued balance;
- Repayment terms are clearly disclosed in a separate agreement;
- The repayment obligation does not exceed 40 hours of paid time off; and
- No interest accrues on the repayment obligation.
This exception may be useful for employers that occasionally provide PTO advances to employees before leave has been accrued.
Civil Remedies Remain Available
Workers and worker representatives retain the right to pursue civil actions for violations.
An employer found liable may be required to pay:
- Actual damages; or
- $5,000 per worker, whichever is greater;
plus:
- Injunctive relief;
- Attorney’s fees; and
- Costs.
Employer Takeaway
Although California’s stay-or-pay restrictions remain scheduled to take effect on January 1, 2027, AB 1697 significantly changes the compliance landscape. In addition to giving employers another year to revise employment agreements, the law creates several important exceptions for government-funded recruitment and retention programs, certain educational repayment agreements, approved apprenticeship programs, carefully structured recruitment and retention bonuses, certain financial-services affiliation agreements, and limited paid-time-off repayment arrangements. Employers should review existing repayment, bonus, training, and retention agreements to determine whether they qualify for one of the new statutory exceptions before the law becomes fully operative.