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California Stay-or-Pay Ban (AB 692 and AB 1697): Contracts From January 1, 2027

March 1, 2026 · updated October 8, 2026

California's ban on stay-or-pay terms now reaches contracts entered into on or after January 1, 2027, not 2026. AB 1697, signed September 30, 2026 as an urgency statute, moved the date back a year, switched the 2026 version of the law off for all of 2026, and widened the exceptions. A training repayment term or bonus clawback in a California contract entered into on or after January 1, 2027 is void unless it fits one of seven exception categories.

Status (as of October 8, 2026): AB 692 signed October 13, 2025 (Chapter 703, Statutes of 2025); amended by AB 1697 (Chapter 889, Statutes of 2026), an urgency statute signed and in effect September 30, 2026 Contract date: applies to contracts entered into on or after January 1, 2027 2026 window: the provisions as they existed on January 1, 2026 are inoperative from January 1, 2026 through December 31, 2026; no liability accrues for acts occurring between January 1, 2026 and September 30, 2026, and any pending claim for that period is moot Employers covered: all employers with workers in California, no size threshold Category: Non-Compete / Employment Contract Restrictions Statute: Business and Professions Code section 16608 (prohibition and exceptions) and Labor Code section 926 (void-contract rule, private right of action, $5,000 minimum), both added by AB 692 and amended by AB 1697

What changed on September 30, 2026

A stay-or-pay term makes a worker pay, or keep paying, when the job ends: training cost repayment, bonus clawbacks, quit fees, and the like. AB 692 banned those terms for contracts entered into on or after January 1, 2026. Nine months in, AB 1697 does four things:

  • Moves the contract date. Section 16608(b)(1) now reads "for contracts entered into on or after January 1, 2027."
  • Switches 2026 off. Section 16608(c)(2) and Labor Code section 926(e): the provisions as they existed on January 1, 2026 are "inoperative from January 1, 2026, to December 31, 2026, inclusive."
  • Clears the first nine months. Section 1(b) of the act prevents "the accrual of liability for acts occurring between January 1, 2026, and the effective date of this act" (September 30, 2026), and any pending claim for that period "shall be moot."
  • Widens the exceptions. Three new carve-outs (grant-funded recruitment and retention bonus programs; affiliation payments by broker-dealers, insurance producers, and investment advisers; advanced paid time off) and a widening of the bonus exception, which no longer applies only "at the outset of employment."

The two 2026 windows are different mechanisms with the same practical result: the no-liability and mootness language runs from January 1 to September 30, 2026, and the inoperative clauses run from January 1 through December 31, 2026. Nothing in the 2026 version of the law is enforceable for any part of 2026, and a contract entered into at any point in 2026 is outside the ban.

What the ban covers for 2027 contracts

For contracts entered into on or after January 1, 2027, section 16608(b)(1) makes it unlawful to include in an employment contract, or to require a worker to sign as a condition of employment or a work relationship, a term that:

  • requires the worker to pay an employer, training provider, or debt collector for a debt if the work relationship with a specific employer terminates;
  • authorizes the employer, training provider, or debt collector to resume or initiate collection, or end forbearance, on a debt when the relationship terminates; or
  • imposes any penalty, fee, or cost on the worker when the relationship terminates.

"Penalty, fee, or cost" includes a replacement hire fee, retraining fee, replacement fee, quit fee, reimbursement for immigration or visa-related costs, liquidated damages, lost goodwill, and lost profit. "Debt" covers money or property due or alleged to be due, including employment-related and education-related costs, "regardless of whether the debt is certain, contingent, or incurred voluntarily." Relocation cost recovery is not named, but the definition is broad enough that such clauses may be reached.

"Worker" means "a natural person who is permitted to work for or on behalf of an employer or business entity, or who is permitted to participate in any other work relationship, job training program, or skills training program," and "includes, but is not limited to, an employee or prospective employee." Training-program participants are inside the definition by its terms; independent contractors and freelancers are not addressed expressly (the section defines "freelance worker" but never uses the term in the prohibition). "Employer" includes any parent company, subsidiary, division, affiliate, contractor, hiring party, or third-party agent, and there is no employee-count threshold anywhere in section 16608 or section 926.

What is still allowed: the seven exception categories

After AB 1697, section 16608(b)(2) lists seven lettered exceptions, (A) through (G). A 2027 contract term that fits one of them is outside the ban.

(A) Government loan programs and grant-funded bonus programs. Part (i), carried over from AB 692: a contract under a loan repayment assistance or loan forgiveness program of a federal, state, or local government agency. Part (ii), new in AB 1697: a contract under 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 the service obligations it requires.

(B) Tuition for a transferable credential. Unchanged word for word from AB 692. "Transferable credential" is a defined term: a degree from a third-party institution that is accredited and authorized to operate in the state, not required for the worker's current job, and transferable and useful beyond the current employer. Company-specific training does not qualify. All five conditions must be met:

  • The contract is offered separately from any contract for employment.
  • Obtaining the credential is not a condition of employment.
  • The repayment amount is specified before the worker agrees to the contract, and it does not exceed the employer's cost of the credential the worker received.
  • Repayment during any required employment period is prorated in proportion to the total amount and the length of the period, with no accelerated payment schedule if the worker separates.
  • The contract does not require repayment if the employer terminates the worker, except for a termination for misconduct. The text speaks to termination by the employer; it does not address a voluntary quit.

(C) Apprenticeships. A contract related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards. Unchanged.

(D) Discretionary or unearned payments, including bonuses. This is the exception that covered sign-on bonuses under AB 692, and AB 1697 widened it: AB 692 limited the payment to one made "at the outset of employment," and AB 1697 deleted those words, so for 2027 contracts a retention or mid-employment bonus can qualify on the same terms as a sign-on bonus. The payment has to be discretionary or unearned and "not tied to specific job performance," and all of the following must hold:

  • The repayment terms are in a separate agreement from the primary employment contract.
  • The worker is notified of the right to consult an attorney about the agreement and given at least five business days to do so before signing.
  • No interest accrues on a repayment for early separation.
  • Repayment is prorated over the remaining retention period, and the retention period cannot exceed two years from receipt of the payment.
  • The worker has the option to defer receipt of the payment to the end of a fully served retention period, with no repayment obligation. (This condition was already in AB 692; AB 1697 did not add it.)
  • Repayment is triggered only if the worker leaves at their own election, or the employer ends the relationship for misconduct.

(E) Residential property. A contract related to the lease, financing, or purchase of residential property, including a contract under the California Residential Mortgage Lending Act. Carried over from AB 692.

(F) Financial-services affiliation payments. New in AB 1697. A discretionary or unearned payment that induces the worker to affiliate with, or stay affiliated with, the employer, where the contract is between a securities broker-dealer, insurance producer, or investment adviser (or an affiliate) and an agent or representative registered with the Securities and Exchange Commission or the Financial Industry Regulatory Authority, licensed by California under Chapter 2 (commencing with Section 25210) or Chapter 3 (commencing with Section 25230) of Part 3 of Division 1 of Title 4 of the Corporations Code, or licensed under Section 1626 of the Insurance Code. Four conditions attach: the repayment terms sit in a separate agreement, the payment is in addition to compensation otherwise payable, the worker is notified of the right to consult an attorney and given at least five business days, and any interest accruing after separation does not exceed the applicable federal rate published by the Internal Revenue Service.

(G) Advanced paid time off. New in AB 1697. A repayment obligation arising from a voluntary separation, for paid time off the employer advanced beyond what the worker had accrued, if the terms are clearly disclosed to the worker, separately from the primary employment contract, when the worker requests the advance; the obligation does not exceed 40 hours of accrued paid time off; and no interest accrues.

No collective-bargaining exception. Section 1(a) of AB 1697 states an intent to provide "a sufficient transition period to accommodate employers operating under a collective bargaining agreement." That is intent language. Nothing in section 16608(b)(2) or Labor Code section 926 exempts unionized employers or contracts governed by a collective bargaining agreement; for 2027 contracts the ban applies to them on the same terms as everyone else.

How the familiar clauses sort for 2027 contracts

  • A sign-on or retention bonus clawback ("repay the $10,000 if you leave within two years") is outside the ban only if it meets every (D) condition. A clawback written into the employment contract itself fails the first condition.
  • A repayment term for company-specific training fits no exception, because the credential is not a degree from an accredited third-party institution. In a 2027 contract the term is void.
  • Contracts entered into before January 1, 2027, including anything signed in 2026, are outside the ban. "Grandfathered" is the common shorthand; the statute simply does not reach them.

Remedies

Labor Code section 926 supplies the remedies, and after AB 1697 they attach only to contracts entered into on or after January 1, 2027:

  • Private right of action. A worker subjected to the prohibited conduct, or a worker representative, may bring a civil action on behalf of that worker, other persons similarly situated, or both.
  • Damages. Actual damages or $5,000 per worker, whichever is greater.
  • Injunctive relief and reasonable attorney's fees and costs.
  • Void contract. A violating term is void as contrary to public policy (section 926(a)) and void under Business and Professions Code section 16600, the section that voids non-competes, as "a contract restraining a person from engaging in a lawful profession, trade, or business" (section 16608(c)(1)).

At $5,000 per worker, 50 California workers on 2027 contracts carrying a prohibited term would put statutory damages at no less than $250,000, before injunctive relief and fees. The figure is a floor, not a cap: the statute awards whichever of actual damages or $5,000 is greater, and section 16608(d) makes the remedies cumulative with those under other laws.

The multi-state picture

New York's Trapped at Work Act was signed December 19, 2025 (chapter 643 of the Laws of 2025) and amended February 13, 2026 by A9452 (chapter 16 of the Laws of 2026). The amendment replaced "immediately" in the original act's effective-date section with "one year after it shall have become a law." That section belongs to the original act, which became law on December 19, 2025, so the amended act takes effect December 19, 2026.

For a multi-state employer, the two states now run on different calendars: New York's rules arrive December 19, 2026, and California's apply to contracts entered into on or after January 1, 2027.

Sources

Verified against the chaptered text of AB 1697 (Chapter 889, Statutes of 2026) and the chaptered text of AB 692 on October 8, 2026, and against the text of New York's A9452 on October 8, 2026. This page was first published March 1, 2026 and revised June 18, 2026; versions before October 8, 2026 described the January 1, 2026 contract date that AB 1697 has since replaced.

This analysis is for informational purposes only and does not constitute legal advice. No attorney-client relationship is created by reading this content. Consult a licensed employment attorney for guidance specific to your organization.

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