January 1, 2027 is now the date that matters for California’s ban on “stay-or-pay” contracts. On September 30, 2026, the Governor signed AB 1697, an urgency bill that moved the start of AB 692’s restrictions back a full year. Training repayment clauses and bonus clawbacks signed in 2026 fall outside the new statute. Clauses signed on or after January 1, 2027 don’t, and the exposure for those is $5,000 per worker or actual damages, whichever is greater, plus attorney’s fees.
What did the Legislature change in AB 1697?
AB 1697 is Chapter 889 of the Statutes of 2026. It was approved by the Governor on September 30, 2026 and took effect that day as an urgency statute. It amends the two sections AB 692 created a year earlier: Business and Professions Code section 16608 and Labor Code section 926.
The main change is the date. The amended section 16608(b)(1) now applies only “for contracts entered into on or after January 1, 2027.” Both sections add a clause saying the 2026 version “shall be inoperative from January 1, 2026, to December 31, 2026, inclusive.” The bill’s uncodified findings go further. According to section 1(b) of AB 1697, the amendments “prevent the accrual of liability for acts occurring between January 1, 2026, and the effective date of this act. Any pending claim based on a violation alleged to have occurred during that period shall be moot.”
The Legislature explained why. Section 1(a) says it meant to “Provide all 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 give employers under a collective bargaining agreement “a sufficient transition period.”
AB 1697 also added three exceptions, covered below, but left the core prohibition and the remedy alone.
What does the stay-or-pay statute prohibit?
Starting with contracts entered into on or after January 1, 2027, section 16608(b)(1) makes it unlawful to put certain terms in an employment contract, or to require a worker to sign them as a condition of the job. One is a term that “Requires the worker to pay an employer, training provider, or debt collector for a debt if the worker’s employment or work relationship with a specific employer terminates.” Another lets the employer, a training provider, or a debt collector start or resume collecting a debt, or end forbearance on one, when the job ends. The broadest, in section 16608(b)(1)(C), is a term that “Imposes any penalty, fee, or cost on a worker if the worker’s employment or work relationship with a specific employer terminates.”
The definitions in section 16608(a) are broad. “Debt” includes money owed “for employment-related costs, education-related costs, or a consumer financial product or service.” “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,” according to section 16608(a)(7). A “worker” includes an employee or a prospective employee, and an oral or implied agreement counts as a contract.
A contract that breaks these rules is treated as a restraint on trade and is void under section 16600, but section 16608(c)(1) says that’s so “only if the contract was entered into on or after January 1, 2027.”
Which repayment terms are still allowed?
Section 16608(b)(2) lists exceptions, and a contract that misses even one condition loses its exception. The table summarizes them.
| Exception | Key conditions in section 16608(b)(2) |
|---|---|
| Government loan repayment or forgiveness programs | Program provided by a federal, state, or local government agency |
| Grant-funded recruitment and retention bonuses (added by AB 1697) | Repayment must follow the grant’s rules and can’t exceed the grant’s service obligation |
| Tuition for a transferable credential | A separate contract, a credential that isn’t a job requirement, amount stated up front and capped at the employer’s cost, prorated with no acceleration, and no repayment if the worker is terminated except for misconduct |
| Apprenticeship programs | Approved by the Division of Apprenticeship Standards |
| Discretionary bonuses not tied to job performance | Separate agreement, notice of the right to consult a lawyer with at least five business days, no interest, proration over a retention period of no more than two years, an option to defer the payment, and repayment only if the worker quits or is fired for misconduct. AB 1697 deleted the earlier limit to bonuses paid at the outset of employment |
| Residential property leases, financing, or purchases | Contract must relate to the property |
| Broker-dealer, insurance producer, and investment adviser affiliation payments (added by AB 1697) | Separate agreement, payment on top of regular pay, notice of the right to consult a lawyer with five business days, post-separation interest capped at the IRS applicable federal rate, and a worker registered or licensed as the statute describes |
| Advanced paid time off (added by AB 1697) | Applies on voluntary separation, disclosed separately when the worker asks for the advance, capped at 40 hours, and no interest |
A transferable credential, under section 16608(a)(10), is “a degree that is offered by a third-party institution that is accredited and authorized to operate in the state, is not required for a worker’s current employment, and is transferable and useful for employment beyond the worker’s current employer.” Most in-house training and vendor certification courses won’t meet that definition, since it requires a degree. In our view that’s the exception employers misread most often.
Where does the exposure come from for contracts signed in 2027?
Labor Code section 926(b) lets a worker or “a worker representative” sue “on behalf of that worker, other persons similarly situated, or both.” Under section 926(c), a person found liable owes “actual damages sustained by the worker or workers on whose behalf the case is brought, or five thousand dollars ($5,000) per worker, whichever is greater, in addition to injunctive relief, and reasonable attorney’s fees and costs.”
The math is what makes this a class action statute. A template sign-on bonus agreement used for 200 hires in 2027 could support a claim of at least $1 million before fees if the template misses a condition, even if the company never collected a dollar from anyone. Section 926(b) gives the right to sue to a worker “subjected to the conduct prohibited by subdivision (b),” and that subdivision makes it unlawful to include the term, not just to enforce it. We expect claimants’ lawyers to argue that including the term is enough. No court has yet decided whether including a term, without any attempt to collect, supports the $5,000 minimum.
Two more points matter for defense. First, the employer definition reaches “any parent company, subsidiary, division, affiliate, contractor, hiring party, or third-party agent of an employer,” so a staffing agency or other agent can itself be treated as an employer, and claimants may try to draw in the company that uses the worker. Second, section 16608(d) says the remedies are cumulative with Labor Code section 2802, the independent contractor rules, and the Unfair Competition Law.
Are agreements signed in 2026 or earlier safe?
They’re outside section 16608, but they aren’t safe by default. Older law still applies to them, and it was never friendly to every repayment clause.
Labor Code section 2802(a) requires an employer to “indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.” Section 2804 makes any agreement “to waive the benefits of this article” void. In In re Acknowledgment Cases (2015) 239 Cal.App.4th 1498, a published Court of Appeal decision, the City of Los Angeles tried to recover police academy costs from officers who left early. The court held that “Labor Code section 2802 precludes the city from requiring recruits to reimburse it for the cost of the portion of the training which is in excess of that required for basic POST certification,” and that the city “cannot avoid application of Labor Code section 2802 by requiring recruits to enter into a contract such as the acknowledgment.”
Voluntary training is a different story. In USS-POSCO Industries v. Case (2016) 244 Cal.App.4th 197, also published, an employee left two months after finishing an optional program that trained him for a transferable trade. The court upheld the repayment agreement and rejected the section 16600 challenge, reasoning that “This was an agreement concerning advanced educational costs. It did not restrain Case from working for a competitor or any other entity.”
So the dividing line for pre-2027 agreements is the one courts already drew. Repayment for training the employer mandates, beyond what the law itself requires for a license, invites a section 2802 claim. Repayment for optional training the job didn’t require is far easier to defend.
What should an employer do with the extra year?
Treat 2026 as a window, not a reprieve. We’d work through it in this order:
- Inventory every agreement, offer letter template, handbook policy, and bonus or relocation form that requires money back when someone leaves, including the ones staffing agencies and training vendors have workers sign, and keep the versions with dates.
- Calendar January 1, 2027 as the cutoff, and flag any template HR will still be using after it, along with any collective bargaining agreement and any employment practices liability (EPLI) policy whose notice terms could matter if a claim is made.
- Identify who signs and approves these agreements, and stop any collection effort that could look like retaliation against an employee who has complained about one.
- Pull the documents that show whether training was optional or required, and whether a law required it or only the company did, because a section 2802 dispute over an older agreement usually turns on those facts.
- Talk to a lawyer before sending a repayment demand, deducting anything from a final paycheck, or rewriting templates for 2027.
The firm’s California employment defense lawyers page covers the defense of claims over employment agreements and repayment terms.
If a former employee is challenging a repayment demand
If your company has sent a repayment demand for training costs or a bonus and the former employee’s lawyer has answered, the date the agreement was signed and whether the training was mandatory usually decide how much risk is real. Rosenberger + Kawabata represents employers defending employment lawsuits and claims through its business litigation practice, including claims involving training repayment agreements. Contact Rosenberger + Kawabata online for a confidential consultation, or call (310) 894-6921.
Sources
The amending statute is AB 1697 (Stats. 2026, ch. 889), and the original is AB 692 (Stats. 2025, ch. 703). The current code sections are Business and Professions Code section 16608, Labor Code section 926, Labor Code section 2802, and Labor Code section 2804. The cases are In re Acknowledgment Cases (2015) 239 Cal.App.4th 1498 and USS-POSCO Industries v. Case (2016) 244 Cal.App.4th 197.
This post is general information about California and federal employment law as of November 5, 2026. It is not legal advice, and reading it does not create an attorney-client relationship. Employment statutes, regulations, and court decisions change often, and the outcome of any claim depends on its facts. Past results do not guarantee future outcomes.