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When employers offer new hires a sign-on bonus or existing employees a retention bonus, they typically structure the bonuses as an upfront payment subject to a conditional repayment obligation if the employee's employment ends prior to a specified retention date.
However, effective Jan. 1, 2026, California Assembly Bill 692 (codified at Business & Professions Code section 16608 and Labor Code section 926) limits an employer's ability to impose repayment obligations for these upfront sign-on and retention bonuses, as well as certain other "stay-or-pay" practices (such as tuition and loan assistance programs), which are not detailed in this blog post.
Will AB 692 Apply Retroactively to Agreements Executed Before Jan. 1, 2026?
No, it will apply only to agreements executed on or after Jan. 1, 2026.
What Limitations Does AB 692 Place on Repayment Obligations for Sign-On Bonuses?
A sign-on bonus – again, a bonus paid upfront to a new hire at the outset of employment conditioned on continued employment through a future retention date – must meet all of the following conditions for its repayment obligation to comply with AB 692:
- Separate Agreement: The repayment obligation terms are set forth in a separate agreement from the primary employment contract (e.g., offer letter or employment agreement);
- Five Day Review Period with Attorney: The employee is notified that they have the right to consult an attorney regarding the agreement and provided at least five business days to do so before signing;
- Two Year Maximum: The retention date may be no longer than two years from the date the sign-on bonus is paid;
- No Interest: The repayment obligation is not subject to interest accrual;
- Prorated Repayment: The repayment obligation must be prorated based on the date of employment separation in relation to the original payment date and the retention date (for example, if the retention date is two years from the date of payment, and the employee voluntarily resigns after exactly one year, the repayment obligation cannot exceed 50% of the sign-on bonus);
- Option to Defer Payment: The employee has an option to defer receipt of the sign-on bonus until the retention date without any repayment obligation; and
- Only Repayable for Certain Separations: The separation from employment triggering the repayment obligation must be due solely to the election of the employee (i.e., voluntary resignation) or at the election of the employer based on the employee's misconduct. In other words, a layoff or other non-misconduct related involuntary resignation may not trigger a repayment obligation.
What Limitation Does AB 692 Place on Repayment Obligations for Retention Bonuses?
As a result of AB 692, a retention bonus – again, a bonus paid upfront to an existing employee after the outset of employment conditioned on continued employment through a future retention date – may not include a repayment obligation, regardless of the specific terms.
If Repayment Obligations for Retention Bonuses Are Prohibited, What Alternatives Might Employers Explore?
In lieu of paying a retention bonus upfront subject to a repayment obligation, employers may be able to achieve a similar goal in other ways, such as:
- Paying a retention bonus in pro-rata installments over time; or
- Deferring payment of the retention bonus until the retention date.
If those alternative structures for retention bonuses are not desirable, employers may instead consider offering eligibility for a performance-related bonus, though that type of bonus inherently serves other purposes and considers other factors than mere retention.
What Potential Liability Do Employers Face for AB 692 Violations?
In addition to being void and unenforceable, non-compliant repayment obligations under AB 692 face the following potential liability:
- An employee's private right of action for an individual or class claim to recover actual damages sustained by the employee(s), or $5,000 per employee (whichever is greater) plus reasonable attorneys' fees and costs; and additionally
- A representative action under the Private Attorneys' General Act.
Might an Employer Avoid AB 692 Requirements by Having the Otherwise Non-compliant Repayment Obligation for the Sign-On or Retention Bonus Governed by Another State's Laws?
Under Labor Code section 925 the brief answer is probably no, unless the employee is in fact individually represented by an attorney in the agreement negotiation and consents to select another state's laws.
However, even if this attorney-representation exception applies, there is a current absence of case law clarifying the exception's continuing enforceability in light of the more recently enacted Business & Professions Code section 16600.5, which generally states that prohibited restraints on trade are unlawful under California law "regardless of where and when the contract was signed." For the avoidance of doubt, nothing in Business & Professions Code section 16600.5 expressly voids Labor Code section 925, but, as of the time of this blog post, no case has directly clarified their potential interaction.
What Next Steps Should Employers Consider?
In advance of Jan. 1, 2026, employers may wish to review their go-forward sign-on and retention bonus practices, policies, and agreements to enhance compliance with AB 692.
Additionally, employers should stay abreast of future interpretive guidance, whether through regulation, case law, or otherwise.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
