On September 30, 2026, California Governor Gavin Newsom signed Assembly Bill (AB) No. 1697, amending existing law prohibiting certain stay-or-pay provisions in employment contracts. The legislation took effect immediately and modifies restrictions originally enacted under AB 692.

Extended Compliance Deadline

AB 1697 provides employers with an additional year to review and revise their employment agreements to comply with California’s restrictions on stay-or-pay provisions.

Previously, the restrictions applied to contracts entered into on or after January 1, 2026. AB 1697 postpones the applicability of these restrictions to contracts entered into on or after January 1, 2027. It further provides that pending claims based on violations alleged during prior to this date are moot.

Changes to Signing and Retention Bonuses

Under prior law, the exception for discretionary or unearned monetary payments was limited to payments made at the outset of employment. AB 1697 removes that limitation, allowing employers to structure repayment obligations for qualifying discretionary and unearned monetary payments, including financial bonuses not tied to specific job performance, made at other points during employment.

To qualify for the exception:

1. The terms of the repayment obligation must be in a separate agreement from the primary employment contract.
2. The employee must be advised of the right to consult an attorney and provided at least five business days to obtain legal advice before signing.
3. Any repayment obligation for early separation is not subject to interest accrual and must be prorated based on the remaining retention period, which cannot exceed two years from receipt of payment.
4. The employee must have the option to defer receiving the payment until completing the retention period, without any repayment obligation.
5. Early separation must be at the employee’s sole election or due to termination for misconduct.

Exception for Securities Broker-Dealers, Insurance Producers, or Investment Advisers

AB 1697 establishes a separate exception for qualifying securities broker-dealers, investment advisers, insurance producers, including their affiliates, in agreements with agents or representatives who meet specified federal registration or California licensing requirements.

Although this exception primarily applies to professionals in the securities, investment, and insurance industries, hospitality employers should be aware that it is industry-specific and does not generally extend to signing or retention bonus arrangements for hotel and restaurant employees.

New Exception for Advanced PTO

AB 1697 adds Business and Professions Code section 16608(b)(2)(G), permitting certain repayment obligations when an employee voluntarily separates after receiving advanced paid time off exceeding their accrued PTO balance.

The exception requires that:

• The repayment obligation be clearly disclosed separately from the primary employment contract when the employee requests the advance.
• The repayment obligation does not exceed 40 hours of accrued PTO.
• No interest may accrue on the repayment obligation.

This exception does not independently authorize deductions from an employee’s final wages. Employers must separately comply with applicable wage deduction restrictions.

Employer Takeaways

Before January 1, 2027, employers should review all employment agreements, signing and retention bonus agreements, offer letters, tuition reimbursement agreements, and advanced PTO policies to ensure compliance with AB 1697. Employers should also review any existing repayment provisions to determine whether they fall within a statutory exception and whether additional disclosures or separate agreements are required.

Stokes Wagner will continue to monitor these developments and provide further updates as they occur. If you have questions, do not hesitate to contact a Stokes Wagner attorney.

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THIS DOCUMENT PROVIDES A GENERAL SUMMARY AND IS FOR INFORMATIONAL/EDUCATIONAL PURPOSES ONLY. IT IS NOT INTENDED TO BE COMPREHENSIVE, NOR DOES IT CONSTITUTE LEGAL ADVICE. PLEASE CONSULT WITH COUNSEL BEFORE TAKING OR REFRAINING FROM TAKING ANY ACTION.