This short reprieve is welcome after many California employers scrambled to adapt their employment contracts to the new Stay or Pay laws, but employers must still act quickly to comply.
STAY OR PAY CONTRACT TERMS STILL WIDELY PROHIBITED
We detailed in a previous LawFlash upon the passage of California Assembly Bill 692 the California statutory ban added in Business and Professions Code Section 16608 and Labor Code Section 926, which prohibits contracts that require employees to repay “debts” (broadly defined) upon leaving their employer, unless the contract satisfies certain requirements. AB 692 was effective for contracts entered into during or after January 1, 2026.
Under AB 1697, the provisions of AB 692 will be effective for contracts entered into on or after January 1, 2027, subject to the following changes:
Exceptions for Retention Bonus Repayment and Tuition Repayment Remain
AB 692 has a limited exception for repayable bonuses that meet certain requirements, but only if the bonus agreement was entered into at the “outset of employment.” AB 1697 has eliminated the “outset of employment” requirement, so that repayable bonuses can be granted under the exception during employment, which was a significant win for employers. The other conditions related to bonus repayment remain in place, including the following:
- The repayment terms are in an agreement separate from the primary employment contract.
- Workers are provided with the opportunity to consult counsel and a reasonable time to do so of no less than five business days before executing the agreement.
- Any repayment obligation for early separation from employment is not subject to interest accrual and is prorated based on any retention period’s remaining term, which cannot exceed two years from the payment to the worker.
- The worker has an option to defer receipt of the payment to the end of a fully served retention period (not to exceed two years) without any repayment obligation.
- Separation from employment before the retention period ends must be at the worker’s sole election or at the employer’s election for “misconduct” as defined in California Unemployment Insurance Code Section 1256.
Tuition Repayment Exception
Another exception included in the AB 692 concerns a contract related to the repayment of tuition costs. AB 1697 did not change this exception. It remains in effect and therefore continues to encompass the following conditions for the tuition repayment agreement:
- The agreement is separate from any contract for employment.
- The agreement does not make obtaining the credential a condition of employment.
- The agreement specifies the repayment amount before the worker agrees to the contract, and the repayment amount does not exceed the cost to the employer of the transferable credential received by the worker.
- The agreement prorates repayment over any required employment period that is proportional to the total repayment amount and the required employment period’s duration, and does not require an accelerated payment schedule if the worker separates from the employment.
- The agreement exempts workers from repayment if the worker is terminated, unless the termination is for “misconduct” as defined in Unemployment Insurance Code Section 1256.
New EXCEPTION FOR securities broker-dealers, insurance providers and investment advisers, and their affiliates
In response to industry group efforts, AB 1697 creates a new exception for securities broker-dealers, insurance providers and investment advisers, and their affiliates that applies to certain contracts with their “agents or representatives” who are registered with the US Securities and Exchange Commission or the Financial Industry Regulatory Authority, licensed under the applicable section of the California Corporations Code, or licensed under the applicable section of the California Insurance Code.
The exception applies to contracts with respect to such workers “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,” if the following conditions are met[1]:
- Repayment obligation terms are set forth in a separate agreement from the “primary employment contract.”
- The discretionary or unearned monetary payment is in addition to compensation that otherwise would be payable to the worker in connection with their employment.
- The worker is notified of the right to consult an attorney for a period of at least five business days to obtain advice regarding the agreement.
- The interest rate charged for any post-employment repayment obligation does not exceed the applicable federal rate published by the Internal Revenue Service
This new exception will be useful for financial services companies that provide loans to workers in various contexts. Companies will need to ensure that their loan documents meet the exception’s requirements, including the prohibition against charging interest above the applicable federal rate after termination of employment.
ADDITIONAL EXISTING EXCEPTIONS
AB 1697 did not alter the additional exceptions that were contained in AB 692, including the below:
- A contract related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards
- A contract entered under any loan repayment assistance program or loan forgiveness program provided by a federal, state, or local governmental agency
- A contract related to the lease, financing, or purchase of residential property, including a contract pursuant to the California Residential Mortgage Lending Act[2]
continued EXPANSIVE CIVIL REMEDIES AND ENFORCEMENT MECHANISMS
While AB 1697 provides some relief, employers are cautioned that the Stay or Pay law continues to include extensive remedies and enforcement mechanisms. The law empowers workers and their representatives to bring civil actions against violators in any court of competent jurisdiction. Prevailing plaintiffs are entitled to actual damages or a minimum of $5,000 per affected worker (whichever is greater), injunctive relief, and reasonable attorney fees and costs. The law also allows workers to bring claims on behalf of other workers “similarly situated.”
The law further continues to clarify that these remedies are cumulative, preserving remedies under such other statutes as the Unfair Competition Law (Business and Professions Code Section 17200), Labor Code Section 2802, and Article 1.5 (commencing with Section 2775) of Chapter 2 of Division 3 of the Labor Code.
NEXT STEPS and business decisions for employers
Next steps for California employers will largely depend on the extent the business has already modified its practices related to debts, including bonuses and tuition programs, in response to AB 692 and whether the business qualifies for the new industry exception to the California Stay or Pay laws.
For those employers that had not yet made changes, they will want to act quickly to audit and revise employment contracts, promissory notes, bonus agreements with repayment provisions, tuition programs and related agreements to ensure any repayment, penalty, or fee provisions meet the requirements of California’s Stay or Pay law no later than January 1, 2027.
For those employers that have modified their contracts, they should review their templates to determine what changes can or should be made. For example, employers may want to allow repayment obligations in bonuses provided during employment, while ensuring that the other requirements of the bonus exception are met. Employers that make loans to employees should review the amendments to determine what changes need to be made to their loan templates to comply with the law.
Finally, employers should review other jurisdictions outside of California, as other states have adopted Stay or Pay laws or are considering doing so. Accordingly, national employers will need to have an approach to bonuses, loans, and tuition programs that comply in all jurisdictions in which they operate and should continue to monitor developments in those states.
