California Passes Bill Amending Prior Legislation Regarding Stay-or-Pay Contract Provisions

Last year, California passed Senate Bill 692, which added Business and Professions Code section 16608 and Labor Code section 926, and provided that, for contracts entered into on or after January 1, 2026, employers could not include any term or otherwise require a worker to agree, as a condition of employment or work relationship, that: (1) the worker will repay the employer, training provider, or debt collector for a debt if the worker’s employment or work relationship with a specific employer terminates: (2) the employer, training provider, or debt collector may resume or initiate collection of or end forbearance on a debt if the worker’s employment or work relationship with a specific employer terminates; or (3) a penalty, fee, or cost may be imposed on a worker if the worker’s employment or work relationship with a specific employer terminates. The bill included several exceptions for which the prohibition would not apply. More information about that bill is detailed in a prior legal update.

This year, California has passed Assembly Bill 1697, which further amends those statutes. The Legislation specifically states that its intent is to “[p]rovide employers with an additional year to structure their employment contracts free of debt traps or quit fees that penalize workers who choose to exercise their freedom of employment” and to “[p]rovide a sufficient transition period to accommodate employers operating under a collective bargaining agreement to successfully come into compliance with the law.”

Specifically, the amendments move the applicable date from January 1, 2026 to January 1, 2027, and expand the exceptions to the prohibition to include the following:

• Contracts for bonuses relating to specified recruitment and retention programs funded by a federal, state, or local government agency grants that offers recruitment or retention bonuses, if the employee repayment obligations comply with the requirements of the grant and do not exceed the service obligations required by the grant;

• Discretionary payments made during the course of employment (previously only applied to those made “at the outset of employment”);

• A contract for the receipt of 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, provided that all of the following conditions are met:

  • The terms of any repayment obligation are set forth in a separate agreement from the primary employment contract;

  • The payment from the employer to the worker is in addition to compensation that would otherwise be payable to the worker in connection with their employment;

  • The worker is notified that they have the right to consult an attorney regarding the agreement and be provided with a reasonable time period of not less than five business days to obtain advice of counsel prior to executing the agreement;

  • If an outstanding repayment obligation continues following separation from employment and interest accrues on the obligation after separation, the applicable interest rate shall not exceed the applicable federal rate published by the Internal Revenue Service for federal income tax purposes;

  • The contract is between a securities broker-dealer, insurance producer, or investment adviser, including their affiliates, and its agents or representatives that meet certain requirements set forth in the statute;

• 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, provided that all of the following conditions are met:

  • The terms of any repayment obligation are clearly disclosed to the worker separate from the primary employment contract upon the worker’s request to receive advanced payment for paid time off in excess of a worker’s accrued paid time off;

  • The repayment obligation does not exceed 40 hours accrued paid time off;

  • The repayment obligation is not subject to interest accrual.

Employers should review their employment agreements to ensure they are in compliance for all contracts entered into on or after January 1, 2027.

This legal update and any use of its information does not create an attorney-client relationship. Nothing contained on this website should be considered legal advice for any specific employer or employment situation. Consult legal counsel before taking any action as a result of information contained herein.