Governor Newsom just signed Assembly Bill 1697 on September 30, 2026. That pushes back California’s new restrictions on “stay-or-pay” employment contracts from January 1, 2026 to January 1, 2027. Why does this matter to you? Because employers across Southern California — West Covina, Los Angeles, Anaheim, San Bernardino, Riverside, Ontario, Pomona — rely on sign-on bonuses, training repayment agreements, and PTO recoupment clauses every day. If your business uses any of these, don’t wait around. Review your contracts now, before that extended deadline shows up faster than you think.
Background: What AB 1697 Means
Here’s the deal: a “stay-or-pay” clause makes an employee pay money back to an employer if they leave before a certain date. We see this most with sign-on bonus clawbacks — quit early, and you owe part of that bonus back. Training cost reimbursement agreements work the same way.
Lawmakers originally wanted these restrictions in place by January 1, 2026. That would’ve banned a lot of repayment penalties tied to an employee quitting. AB 1697 changes the timeline. Signed September 30, 2026, it delays everything to January 1, 2027. It also widens the exceptions — giving businesses more room to use retention bonuses (pay to keep someone around for a set stretch) and PTO recoupment arrangements (deducting or recouping unused paid time off under the right conditions).
Supporters of the delay say it gives small-business employers more time to revise hiring and bonus agreements without facing immediate penalties. The bill text and legislative history are available through the California Legislative Information website. As of October 16, 2026, the California Lawyers Association and other legal commentary sources, including coverage on calawyers.org and jdsupra.com, confirm the new compliance date of January 1, 2027.
How This Affects Southern California Employers
Small and mid-sized businesses throughout Los Angeles County, Orange County, San Bernardino County, and Riverside County often rely on sign-on bonuses and training agreements to attract and retain workers in competitive local labor markets. Employers in cities like West Covina, Anaheim, Riverside, and Ontario who planned to remove or rewrite these clauses by January 1, 2026 now have an additional year to prepare.
This delay does not mean employers can ignore the issue. The expanded exceptions for retention bonuses and PTO recoupment mean that some existing agreements may already fall outside the new restrictions, while others may still need updates. Employers who sponsor foreign workers and use repayment clauses tied to visa petition costs should also review how these rules interact with their sponsorship agreements. Businesses considering sponsorship of international talent may want to review related obligations alongside their employment-based visa planning, including employers using the H-1B specialty occupation visa process, since recoupment clauses are sometimes tied to visa filing costs.
Employers who fail to prepare before January 1, 2027 may face disputes with departing employees, including claims that repayment clauses are unenforceable. These disagreements can lead to litigation. Businesses facing contract disputes with current or former employees may need guidance related to business disputes and litigation.
What You Should Do Now
Even though the deadline moved, employers should not wait until late 2026 to act. Consider these steps:
- Review existing agreements. Identify every sign-on bonus, training repayment, and PTO recoupment clause currently in use.
- Check the new exceptions. Determine whether your retention bonus or PTO policy may qualify under the expanded exceptions in AB 1697.
- Update employment contract templates. Draft revised language that can comply with the restrictions taking effect January 1, 2027.
- Train HR and hiring managers. Make sure staff understand which clauses remain enforceable and which do not.
- Document your compliance timeline. Keep records showing good-faith efforts to prepare before the new deadline.
- Watch for further guidance. State agencies and courts may issue additional interpretation of AB 1697 before January 1, 2027.
Employers who also handle commercial leases, vendor contracts, or other agreements as part of running a small business may benefit from a broader review of their real estate and construction contracts at the same time, since many businesses update multiple agreement types together.
How TEZ Law Firm Can Help
TEZ Law Firm works with Southern California business owners to review employment agreements, bonus clauses, and repayment terms for compliance with California law, including AB 1697. The firm can help employers update contract templates, assess which exceptions may apply to existing bonus and PTO arrangements, and respond to disputes that arise from repayment clauses. Attorneys can also coordinate with a business’s other legal needs, such as contract disputes or corporate structuring questions.
Frequently Asked Questions
What is a stay-or-pay clause?
A stay-or-pay clause is a contract term that requires an employee to repay money, such as a sign-on bonus or training cost, if they leave the job before a set date. California’s new law places limits on when employers can enforce these clauses.
When does AB 1697 take effect?
AB 1697 delays the original January 1, 2026 effective date to January 1, 2027. Employers now have an extra year to update their agreements before the restrictions apply, as of October 16, 2026.
Are retention bonuses still allowed?
AB 1697 expands exceptions for retention bonuses, meaning some retention bonus arrangements may remain enforceable under the revised rules. Whether a specific bonus qualifies depends on how the agreement is written.
Does this law affect PTO recoupment policies?
Yes. AB 1697 also expands exceptions related to PTO recoupment, which may allow certain paid-time-off repayment arrangements to continue under specific conditions. Employers should review their current PTO policies against the updated exceptions.
Do small businesses in Southern California need to do anything right now?
Even with the delay, small businesses in cities like West Covina, Pomona, and San Bernardino may want to begin reviewing their bonus and repayment agreements now, since the January 1, 2027 deadline will arrive quickly once the current year ends.
If your business uses sign-on bonuses, training repayment agreements, or PTO recoupment clauses, reviewing your contracts before January 1, 2027 can help reduce the risk of disputes later. Contact TEZ Law Firm to schedule a consultation and discuss how AB 1697 may affect your employment agreements.
This article is general information, not legal advice, and reading it does not create an attorney-client relationship. Laws and agency practices change; contact TEZ Law Firm (West Covina, California) at 626-888-6856 or [email protected] about your situation. Prior results do not guarantee a similar outcome.