California employers navigating compensation agreements face a new development after Governor Gavin Newsom signed Assembly Bill 1697 on September 30, 2026.
The new legislation postpones the application of California’s restrictions on employment-related repayment obligations, originally introduced under Assembly Bill 692.
AB 692 had added Section 16608 to the California Business and Professions Code and Section 926 to the Labor Code, taking effect January 1, 2026.
Those provisions generally prohibited contracts from requiring workers to repay debts or incur financial penalties simply because their employment or work relationship ends.
The law created significant disruption for traditional sign-on and retention bonus arrangements that required repayment if employees departed before completing a specified service period.
AB 1697 makes three key changes: it pushes the restrictions’ applicability date to January 1, 2027, expands exceptions for certain discretionary monetary payments, and adds exceptions for specific government-funded programs and financial services arrangements.
Critically, the amendment does not eliminate the underlying prohibition, and violations from January 2027 onward may still result in civil liability of actual damages or $5,000 per worker, whichever is greater.
Agreements entered into before January 1, 2027, fall entirely outside AB 692’s new statutory prohibition, even if an employee’s repayment obligation occurs after that date.
Employers that already revised their agreements during 2026 to comply with AB 692 are not required to retroactively modify those agreements under the amended law.
However, the reprieve does not override California’s existing restrictions on employee mobility or other applicable laws that govern agreements regardless of execution date.
Perhaps the most consequential change under AB 1697 is the removal of a restriction that previously limited a key exception to payments made only “at the outset of employment.”
That original limitation created obstacles for employers seeking to offer retention bonuses or relocation incentives to existing employees rather than exclusively to new hires.
With that language removed, qualifying bonuses offered during an ongoing employment relationship may now fall within the statutory exception, providing greater structural flexibility for employers.
To qualify for the exception, the payment must be discretionary or unearned and cannot be tied to specific job performance metrics outlined in the primary contract.
The agreement must be set out separately from the primary employment contract, and employees must be given at least five business days to consult legal counsel before signing.
Any repayment obligation must be interest-free and prorated against a retention period not exceeding two years from the date the payment is received by the employee.
Employees must also retain the option to defer receipt of the payment until completing the retention period, which would eliminate any repayment obligation entirely.
Repayment can only be triggered by voluntary separation or an employer-initiated termination for misconduct as defined under California Unemployment Insurance Code Section 1256.
AB 1697 also introduces narrowly tailored exceptions for government grant-funded recruitment programs, qualifying financial services and insurance professionals, and limited paid-time-off advances following voluntary separation.
Employers should now review all existing offer letters, sign-on bonus agreements, retention arrangements, relocation incentives, and training repayment agreements before January 1, 2027.
Those reviewing future-facing templates must identify repayment provisions that will require modification and assess whether the revised exceptions provide sufficient flexibility for their compensation strategies.
AB 1697 offers employers additional time and options but does not reverse California’s broader direction on restricting employment-related repayment obligations, making proactive compliance planning essential.