California has long had the nation’s most stringent laws against restrictive covenants. On September 15, 2025, the California legislature increased the potential scope of those laws, and whether by intention or mistake, set the state on a path to change existing laws on retention bonuses for current employees.
Assembly Bill 692 will go into effect on January 1, 2026 unless the bill is vetoed by the Governor by October 13, 2025. If enacted, the law will prevent workers from having to repay debts to their employer when they leave, except under certain conditions. While sounding innocuous as a general description, the devil again is in the details, through the definitions and exceptions in the new law. A debt as described by the law is defined as: “money, personal property, or their equivalent that is due or owing or alleged to be due or owing from a natural person to another person, including, but not limited to, for employment-related costs, education-related costs, or a consumer financial product or service, regardless of whether the debt is certain, contingent, or incurred voluntarily.” Particularly troublesome for employers is the exception to the law that provides that the section does not apply to contracts for the receipt of a discretionary or unearned monetary payment, including a financial bonus, at the outset of employment that is not tied to specific job performance, provided that all of a series of the following conditions are met:
- The terms of any repayment obligation are set forth in a separate agreement from the primary employment contract.
- The employee is notified that they have the right to consult an attorney regarding the agreement and provided with a reasonable time period of not less than five business days to obtain advice of counsel prior to executing the agreement.
- Any repayment obligation for early separation from employment is not subject to interest accrual and is prorated based on the remaining term of any retention period, which shall not exceed two years from the receipt of payment.
- The worker has an option to defer receipt of the payment to the end of a fully served retention period without any repayment obligation.
- Separation from employment prior to the retention period was at the sole election of the employee, or at the election of the employer for misconduct.
So, what happens when an employee, say in the financial services field, has received a retention bonus during employment that has a condition that the bonus or some part of it will need to be returned if the employee leaves? The short answer is that that money will belong to that employee once given and any condition to return any part of it will be void because it does not fall within the safe harbor of being given or agreed to “at the onset of employment.”
Whether by inadvertence or design, Assembly Bill 692 will have a dramatic effect on compensation in financial services and any other field where retention bonuses are part of the employment landscape.
And, the bill goes farther. Under its terms, not only is any agreement to return part of any retention bonus once the employee leaves void and contrary to public policy, but such an agreement entitles the employee to sue. And while the law also provides for penalties in the sum of $5,000, it also provides for attorney’s fees and is a cumulative remedy with any other remedies allowed under state law.
Therefore, while companies do not need to change any agreements now, they will need to take a careful look with their counsel at any agreement that may fall within the ambit of the new law to ensure compliance after January 1, 2026 and to make sure that any agreements for retention bonuses take the new law into account.
The Employment Labor and Workforce Management Group at Epstein Becker Green, P.C. will be monitoring the progress of Assembly Bill 692. Stay tuned for the latest.
