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Seyfarth Synopsis: Effective January 1, 2026, new California law prohibits stay-or-pay clauses in contracts of employment with limited exceptions.
Under new Section 16608 of the California Business and Professions Code, effective January 1, 2026, employers are prohibited from entering into an employment contract or other contract relating to the employment relationship that requires an employee to repay any amount to the employer upon termination of employment, except in specific limited circumstances.The law provides that contracts with non-compliant stay-or-pay provisions will be treated as void.Also, an affected employee can bring a civil lawsuit in which they can seek damages in the amount of the greater of their actual damages or $5,000, injunctive relief, and attorneys' fees and costs related to the lawsuit.
One of the exceptions to the prohibition on these repayment obligations, that will likely be themost commonly used, is for discretionary payments made at the outset of employment (e.g. sign-on bonuses or relocation reimbursements) if each of the following conditions are met: (1) the promise to repay is in a separate written agreement; (2) the employee is notified of the right to consult an attorney no less than five days prior to signing the agreement; (3) any repayment obligation cannot be longer than 2 years; (4) the amount to be repaid must be prorated upon termination for the remaining retention period; (5) no interest is charged on the repayment amount; (6) the employee must be given the option to instead defer the payment to the end of the fully-served retention period with no repayment obligation; and (7) repayment can only be required if the employee voluntarily elects to leave or if the employee is terminated for misconduct (as defined in the CA labor code).
The new code section also has other exceptions relating to repayment of tuition assistance, certain government loans, and residential leasing or purchase assistance. For further information on these exceptions and an in depth discussion of the new law, see Seyfarth's prior blog post here.
Note that the new law is not triggered by a provision promising to pay an amount after a certain retention period is completed (without any repayment obligation) or otherwise deferring payments to a future date.
Employers should review existing offer letters and other employment contracts with California employees to identify payments or other benefits offered in exchange for an employee's promise to repay upon termination of employment prior to completing a retention period. Any agreements with these provisions will need to be amended to fit into an exception, or to remove the repayment obligations.
This shift will also require employers to rethink how they offer sign-on and other retention bonuses to employees in California in the future.Restructuring these payment arrangements in a thoughtful manner will not only help employers to avoid costly penalties and litigation, but also should give employers a competitive advantage in recruiting and retaining employees in California.
Please contact the author or the employee benefits attorney at Seyfarth with whom you usually work if you have any questions regarding compliance with these new California restrictions.
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.
