AB 1697 (2026): Stay-or-Pay Ban Takes Effect in 2027 With Exceptions

Authority

Cal. Legislature

Citation

Stats. 2026, ch. 889

Effective Date

September 30, 2026

Assembly Bill 1697, by Assembly Member Kalra, amends Business and Professions Code section 16608 and Labor Code section 926 to change when California’s prohibition on “stay-or-pay” employment contract terms applies. The law now reaches contracts entered into on or after January 1, 2027, rather than January 1, 2026, and it adds several exceptions to the prohibition. Because it is an urgency statute, it took effect immediately on September 30, 2026, the date it was filed with the Secretary of State.

Background

Existing law generally bars an employment contract from requiring a worker to pay certain penalties, fees, costs, or debts tied to employment or education if the worker’s employment or work relationship ends. Such terms are void and contrary to public policy as a restraint on engaging in a lawful profession, trade, or business, and a worker may bring a civil action for penalties and relief.

Those provisions, found in Business and Professions Code section 16608 and Labor Code section 926, had applied to contracts entered into on or after January 1, 2026. Assembly Bill 1697 moves that start date and carves out defined categories of contracts that fall outside the prohibition.

What the Law Changes

The bill applies the prohibition to contracts entered into on or after January 1, 2027. Under the amended section 16608, it remains unlawful to require a worker to pay an employer, training provider, or debt collector for a debt on separation, to authorize renewed collection on such a debt on separation, or to impose a penalty, fee, or cost on a worker if the employment or work relationship ends.

The Legislature stated that this change gives all employers, including those operating under a collective bargaining agreement, an additional year to bring their contracts into compliance. It also provides that liability does not accrue for acts occurring between January 1, 2026, and the effective date of the act, and that any pending claim based on an alleged violation during that period is moot.

Exceptions the Bill Adds

The amended section 16608 lists contracts that the prohibition does not reach. These include government-funded loan repayment or forgiveness programs, certain grant-funded recruitment and retention bonus programs, tuition repayment for a transferable credential offered separately from employment, apprenticeship programs approved by the Division of Apprenticeship Standards, and contracts for the lease, financing, or purchase of residential property.

Further exceptions cover discretionary or unearned bonuses that meet conditions such as a separate agreement, a right to consult counsel with at least five business days to do so, no interest accrual, and a retention period not exceeding two years. A related exception addresses affiliation inducements for registered or licensed securities broker-dealers, insurance producers, and investment advisers and their agents, subject to conditions including an interest cap at the applicable federal rate. A final exception covers repayment of advanced paid time off upon voluntary separation, limited to 40 hours of accrued paid time off and without interest.

Labor Code section 926 continues to allow a worker or worker representative to bring a civil action, with liability for actual damages or $5,000 per worker, whichever is greater, plus injunctive relief and reasonable attorney’s fees and costs. Section 926 applies only to contracts entered into on or after January 1, 2027.