Game Changer: New Exceptions to California’s Clawback (Stay-or-Pay) Law

California Governor Gavin Newsom signed AB 1697 into law on September 30, 2026, amending with immediate effect the clawback (stay-or-pay) law enacted last year (previously explained here and here) to give employers some relief.

Certain tuition repayment, apprenticeship programs, federal/state loan forgiveness, and residential property contracts remain exempt from clawback restrictions, subject to specific requirements. The changes create greater flexibility for employers to meet their compliance obligations prior to the rapidly approaching deadline.

Delayed Effective Date

The most immediate relief under the amendments is the one-year extension of the law’s effective date to January 1, 2027. However, this is a compliance deadline for the new law only and does not create an open season for clawbacks: plaintiffs may still challenge existing agreements under other legal theories.

Expanded Bonus Timing Flexibility

The amendments remove the requirement that bonus repayment contracts be entered into “at the outset of employment” in order to qualify for an exception under the law, allowing employers to require repayment of certain sign-on, retention, and recruiting bonuses and special cash incentives advanced at any point during employment. The other bonus repayment conditions remain in place. Contracts for the receipt of discretionary or unearned payments must still meet the following conditions in order to be made subject to a clawback provision:  

• The payment is not tied to performance.
• The employee is notified of the right to consult an attorney and provided with a reasonable review period of at least five business days.
• The employee has the right to defer receipt of the payment until it is fully earned in accordance with the contract and no longer subject to clawback.
• The repayment obligation:
  • is included in a separate contract from the primary employment agreement,
  • is not tied to a required employment period of longer than two years,
  • does not include interest,
  • is prorated based on the remaining portion of any required employment period, and
  • applies only if the employee resigns or is terminated for misconduct.

New Financial Services Exception

AB 1697 creates a new exception for employees of securities broker-dealers, insurance providers, investment advisers, and their affiliates who are agents or representatives registered with the SEC or FINRA, or licensed under California law.

The exception applies to contracts with such workers for discretionary or unearned payments offered as inducements to affiliate or maintain an employment relationship, provided the following conditions are met:

• The payment is not tied to performance.
• The payment is in addition to compensation otherwise payable to the worker in connection with employment.
• The repayment obligation terms are included in a separate contract from the primary employment agreement.
• The worker is notified of the right to consult an attorney and provided with a reasonable review period of at least five business days.
• Any interest accruing on an outstanding repayment obligation after separation cannot exceed the applicable federal rate published by the IRS for federal income tax purposes.

PTO Advancement Repayment

Employers can recover certain PTO advances when an employee voluntarily separates before earning the advanced leave, provided the following conditions are met:

• The repayment obligation terms are included in a separate contract from the primary employment agreement, made at the employee’s request for an advance exceeding their accrued PTO.

• The repayment obligation is capped at 40 hours of PTO.
• No interest may accrue.

As a reminder, this exception does not authorize California employers to make automatic deductions from employees’ final paychecks.

Enforcement Actions and Remedies

The enforcement mechanisms and potential damages and penalties remain the same:

• Workers or their representatives can sue individually or as a class on behalf of “similarly situated” workers.
• Prevailing plaintiffs may recover the greater of actual damages or $5,000 per worker, plus injunctive relief and reasonable attorney fees and costs.
• These remedies do not limit other remedies available under California law.

What California Employers Should Do Now

The amendments suspend the original provisions of the stay-or-pay ban until January 1, 2027. This gives employers a few months to make adjustments necessary for compliance.

Employers should take the following steps:

• Consider whether to use (or continue using) pre-stay-or-pay clawback provisions in offer letters and employment agreements through the end of 2026.
• Audit all repayment agreements, including, but not limited to, sign-on and retention bonuses and relocation repayment provisions.
• Decide when to pay non-performance bonuses during employment (not just at hire) and establish retention periods and payment schedules for each bonus type to streamline the administration of these bonuses year to year.
• If you are an employer in the financial services industry, evaluate whether the new exception allows additional flexibility with some of your employees.
• Train HR and recruiting teams on the new restrictions and compliant compensation practices.
• Given the complexity and litigation risk, have employment counsel review your compensation structures and agreements.

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For additional information about the issues discussed in this Insight, please contact the attorney(s) listed on this page or the Epstein Becker Green Employment, Labor & Workforce Management attorney who regularly handles your legal matters.

Staff Attorney Elizabeth A. Ledkovsky assisted with the preparation of this Insight.