Seyfarth Synopsis: College football fans know that sometimes a game is won or lost after a late fourth-quarter replay review. Just when employers thought they knew the rules of California’s new “stay-or-pay” law under AB 692, the Legislature stepped in with a significant replay review of its own. On September 30, 2026, Governor Newsom signed AB 1697 into law, which delays AB 692’s applicability by a year, eliminates potential liability for 2026 “stay-or-pay” activity, clarifies existing and creates new exceptions. Read on for California’s revised “stay-or-pay” playbook.
As we previously discussed, last year, California enacted AB 692, one of the nation’s most aggressive restrictions on employee repayment obligations, training repayment agreements, retention incentives, and other arrangements that could require workers to repay money upon leaving employment. Mid-game, however, the Legislature reopened the playbook.
On September 30, 2026, Governor Newsom signed AB 1697, an urgency measure that immediately amends AB 692 in several significant respects.
For employers that spent the last year preparing for AB 692, California has effectively called a timeout. The game is still on, but the rules have changed.
First Quarter: The Legislature Delays Kickoff Until January 1, 2027
Most notably, AB 1697 delays enforcement of AB 692. The law now applies only to contracts entered into on or after January 1, 2027. The Legislature explained that the delay is intended to provide employers with additional time to ensure compliant restructured agreements, including employers operating under collective bargaining agreements.
AB 1697 goes even further and erases the first season from the standings. The statute provides that the prior version of the law is inoperative from January 1, 2026 through December 31, 2026. It also states that pending claims based on alleged violations occurring between January 1, 2026 and the effective date of AB 1697 are moot.
Second Quarter: A Targeted Carve-Out for the Financial Services Industry
In a surprise play, AB 1697 also creates a new exception for the financial services industry.
Specifically, the law permits certain discretionary or unearned monetary payments intended to induce a worker to affiliate with, or remain affiliated with, an employer. The exception only applies to agreements involving securities broker-dealers, investment advisers, insurance producers and their affiliates, together with qualifying registered or licensed agents and representatives.
The carve-out appears aimed at business models where recruiting packages, transition assistance, affiliation incentives, and similar arrangements have long been commonplace.
As with the financial incentives exception, however, the details matter. To qualify for the financial services industry exception the terms must be included in a separate agreement that provides attorney consultation rights, compensation structure, and limitations on interest accrual. Employers should carefully review existing arrangements before assuming they qualify.
Notably, this industry-specific exception may be particularly important for businesses that have spent the past year evaluating whether forgivable loans, recruiting packages, and affiliation incentives remain viable under California’s stay-or-pay restrictions.
Halftime Adjustment: California Changes Course on Financial Incentives
AB 1697 makes an important change to AB 692’s limited exception for certain financial incentives by removing the “at the outset of employment” requirement. Instead of focusing on when an incentive is paid, the amended statute focuses on how the arrangement is structured. To this end, AB 1697 includes broader exceptions for retention bonuses, recruitment incentives, and other common incentive-related payments that satisfy certain requirements, including:
- The repayment obligation be contained in a separate agreement;
- Employees receive notice of their right to consult counsel and at least five business days to do so;
- Any repayment obligation be prorated;
- Any retention period not exceed two years;
- Employees have the option to defer receipt of the payment until the retention period is completed; and
- Repayment generally be triggered only by voluntary separation or separation for misconduct.
This shift more directly aligns with the reality of such financial incentives, which are not universally prohibited “quit fees” and are commonly offered not only at the outset of employment but also mid-employment.
For employers seeking to retain key talent in a competitive labor market, this exception may prove to be one of the most consequential amendments in the bill.
Third Quarter: The Legislature Calls a New Play for Repayment of Advanced PTO
Another area of confusion impacting AB 692 compliance efforts was whether it applied to agreements for repayment of advance paid time off to an employee. The Legislature cleared this up with the addition of a targeted exception that allows for enforcement of a repayment obligation arising from an employee’s voluntary separation if (1) the arrangement is disclosed separately from the employment contract, (2) arises from the employee’s request for advanced PTO, (3) is limited to no more than 40 hours of PTO, and (4) does not accrue interest.
Fourth Quarter: Tuition Agreements Stay in the Game with No Changes
AB 1697 preserves some of AB 692’s exceptions, including repayment of tuition associated with a transferable credential. As before, the arrangement must be included in a standalone agreement, the credential must be for a “degree,” cannot be required as a condition of employment, repayment must be prorated and limited to the employer’s actual costs, and repayment generally cannot be required if the worker is terminated other than for misconduct.
The bill also retains existing exceptions for government-sponsored loan repayment and loan forgiveness programs, government-funded recruitment and retention programs, apprenticeship programs approved by the Division of Apprenticeship Standards, and contracts related to the lease, financing or purchase of residential property.
Questions Remain After The Final Whistle
AB 1697 is far more than a technical cleanup bill, but it still leaves several important questions unanswered. For example, the statute’s definition of “worker” continues to create uncertainty. Earlier versions of AB 692 expressly referenced independent contractors, but that language was removed before enactment. Yet the statute still defines a “worker” broadly enough to include individuals participating in a “work relationship,” which may continue to generate questions regarding the law’s application outside of traditional employment relationships, including principals in a business.
Similarly, California’s definition of a “transferable credential” remains unusually narrow. Unlike some other states that have enacted restrictions on training repayment or stay-or-pay arrangements, AB 692’s exception is limited to degrees offered by accredited institutions authorized to operate in California. As a result, uncertainty may remain regarding the treatment of many employer-provided training programs, certifications, licenses, and other credentialing arrangements that do not fit neatly within the statutory definition.
Workplace Solutions: What Employers Should Do Before January 1, 2027
While California is not alone in attempting to address the perceived impact of stay-or-pay agreements on employee mobility, its restrictions remain among the most expansive in the country. After AB 1697, employers at least have a revised playbook, more time on the clock, and greater guidance regarding which incentive arrangements may remain in bounds when the law takes effect on January 1, 2027.
In reality, although the law states it was intended to provide employers with an additional year to address their agreements before the law takes effect, employers will only have a few months left in 2026. Employers should use the extra time strategically to:
- Inventory existing sign-on bonus, retention bonus, training repayment, tuition reimbursement, forgivable loan, and other repayment arrangements.
- Identify agreements that may qualify for one of the newly expanded statutory exceptions.
- Update any prior changes to remove the “at the outset of employment” restriction.
- Reassess recruitment, retention, and affiliation strategies for 2027 and beyond.
The authors or your favorite Seyfarth lawyer are here to help navigate compliance within AB 1697’s revised statutory framework.