Question: I heard that California’s “stay-or-pay” law was repealed. Is that true?
Answer: No, the law was not repealed. Instead, it was delayed for a year. The state’s “stay-or-pay” restrictions were originally set to be effective January 1, 2026. On September 30, 2026, Governor Newsom signed AB 1697, which pauses enforcement of the restrictions until January 1, 2027. In addition, the law eliminates retroactive liability for 2026.
Despite this temporary breathing room, employers cannot do the following starting January 1:
- Require an employee to pay an employer, training provider, or debt collector for a debt if the employee’s employment with the employer ends;
- Authorize the employer, training provider, or debt collector to resume or initiate collection of a debt if the employee’s employment with the employer ends; or
- Impose any penalty, fee, or cost on an employee if the employee’s employment or work relationship” with the employer ends.
Although the law is expansive, it will not apply to various situations, including:
- Agreements entered into before January 1, 2027;
- Agreements entered into with independent contractors;
- A contract entered into under any loan repayment assistance program or loan forgiveness program provided by a federal, state, or local governmental agency;
- A contract related to enrollment in an apprenticeship program approved by the California Division of Apprenticeship Standards”;
- Tuition repayment for a transferable credential that “is offered separately from any employment contract” and does not require repayment to the employer if the worker is terminated, except if the worker is dismissed for misconduct; or
- Retention bonus agreements, provided they meet certain conditions.
AB 1697 also expanded and clarified some critical exceptions, giving employers much-needed flexibility before the new deadline:
- Expanded Bonus Repayment: Under the original framework, repayment clauses for sign-on or retention bonuses were permitted only if executed “at the outset of employment”. AB 1697 removed this restriction. Employers can now implement retention bonus repayment agreements for existing employees at any point, provided that the bonus is not tied to specific job performance, repayment terms are in a separate agreement, the employee has five business days to consult an attorney, no interest accrues, the repayment is prorated over a period not exceeding two years, the employee can defer receipt of the payment to the end of a fully-served retention period without repayment obligation, and the employee resigned (or was fired for misconduct).
- New Advanced PTO Exception: Employers can now legally recover advanced but unearned vacation or paid time off (“PTO”) balances of up to 40 hours when a worker voluntarily resigns, provided that no interest is charged and the policy was clearly disclosed when the employee requested the advance.
- Government and Educational Programs: Exemptions remain intact for government-funded recruitment or loan forgiveness programs, approved apprenticeship programs, and specific transferable credentials offered independently of the employment contract.
With the January 1, 2027, effective date rapidly approaching, employers should not be complacent. Employers are encouraged to use the next few months to audit all offer letters, signing bonuses, relocation agreements, and training or tuition reimbursement programs. Employers may work with their labor counsel to restructure these agreements to ensure legal compliance.