As CDF reported last year, California enacted Assembly Bill 692 (AB 692), which banned employment contracts known as TRAPs that required employees to pay penalties, fees or costs commonly tied to training if the employee ended the relationship. The TRAP law was effective January 1, 2026, and exposed employers to damages or $5,000 per worker (whichever is greater), plus injunctive relief and attorney’s fees, in individual or class-wide actions.
The good news for employers is that the California Legislature passed Assembly Bill 1697 (AB 1697), that pushes the start date back one year to January 1, 2027, modifies and adds several exceptions, and removes potential exposure for 2026. Governor Newsom is expected to sign it, and if signed, it will take effect immediately.
A New Timeline (With a Catch)
While the new law will not be enforceable until January 1, 2027, the intent is to allow employers to eliminate “debt traps” and quit fees. However, we expect Plaintiffs’ counsel to continue to pursue claims that such agreements do not comply with other California laws, including Business and Professions Code section 16600, Labor Code section 2802, and the Unfair Competition Laws.
Employers that already attempted to meet the original January 1, 2026 deadline may wish to revisit their revisions to ensure compliance.
What Is Changing: Expanded and New Exceptions
AB 1697 leaves existing exceptions largely intact. For example, employers may require employees to repay tuition for certain optional degree programs that employees might use to obtain work with other employers. Employers may also require repayment of certain bonuses if an employee resigns or is terminated for misconduct. Exceptions also apply to approved apprenticeship programs. AB 1697 expands these exceptions to cover additional bonus arrangements, certain grant-funded recruitment and retention bonuses, PTO that is advanced, and certain payments in the financial-services industry.
Bonus Exception
The original law provided an exception for the repayment of signing bonuses or other bonuses made at the outset of employment, subject to certain conditions. The bonus had to be addressed in a separate written agreement, and the employee had to be notified of the right to consult an attorney and provided at least five business days to do so. Any repayment had to be prorated without interest over a retention period of no more than two years. The employee also had to have the option to wait until the end of the retention period to receive the bonus, avoiding any repayment obligation. Finally, repayment could be required only if the employee resigned or was terminated for misconduct.
AB 1697 seems to expand the exception to certain qualifying payments made later in the employment relationship, such as retention or other incentive bonuses. The remaining statutory safeguards continue to apply, so employers should evaluate bonus repayment provisions and should not assume that any bonus clawback is permissible.
Government Grant-Funded Recruitment and Retention Bonuses
Employers may require repayment of recruitment or retention bonuses offered under a program funded by a federal, state, or local government agency grant, provided the repayment obligation complies with the grant’s requirements and does not exceed the service obligation imposed by the grant.
Advanced Paid Time Off
Employers may recover PTO advanced beyond an employee’s accrued balance when the employee voluntarily separates, subject to certain conditions. When an employee requests an advance, the employer must separately provide the employee with a clear written disclosure of the repayment terms. The repayment obligation cannot not exceed 40 hours, and no interest may accrue.
Because the exception applies only to voluntary separations, it does not cover employer initiated termination. The exception allows employers to continue permitting employees to borrow against future accruals while keeping repayment obligations limited and transparent.
Financial Services Affiliation Payments
Securities broker-dealers, insurance producers, and investment advisers, including their affiliates, may impose repayment terms on certain inducement payments made to agents and representatives who are registered with the SEC or FINRA or licensed under specified provisions of the California Corporations Code or Insurance Code. The payment must be in addition to compensation otherwise payable, documented in a separate agreement, and accompanied by notice of the right to consult an attorney and at least five business days to review the agreement. Any interest charged after separation may not exceed the IRS applicable federal rate.
Unlike the general bonus exception, this exception does not impose a two-year cap, proration requirement, deferral option, or limitation on repayment to resignations and misconduct terminations. It appears aimed at preserving the forgivable loans and transition packages commonly used in financial-services recruiting.
New Questions for Employers
When Does Repayment Become a Penalty?
Employers should not assume that labeling an obligation as a “repayment” places it outside the statute. The law prohibits requiring repayment of a debt upon separation and imposing penalties, fees, or costs triggered by termination. Permissible repayment obligations fit into a narrow statutory exception. How courts will distinguish a qualifying repayment arrangement from a provision that impermissibly burdens employee mobility remains an open question.
Practical Steps to Take Now
- Inventory repayment provisions. Review offer letters, bonus agreements, tuition and training agreements, relocation packages, forgivable loans, PTO policies, and other arrangements that may impose a financial obligation on employees that is connected to separation to determine whether such provisions fit within the new law’s exceptions.
- Update agreements and policies for 2027. Employers should use the remaining months of 2026 to revise template agreements for use beginning January 1, 2027. Employers that permit PTO advances should ensure recoverable advances do not exceed 40 hours, provide the required separate disclosure when the employee requests the advance, eliminate interest, and limit recovery to voluntary separations.
- Review specialized arrangements. Financial-services firms should confirm that covered agents and representatives meet the applicable registration or licensing requirements and conform inducement or forgivable-loan documents to the new exception. Employers using government grant-funded recruitment or retention bonuses should align repayment obligations with the underlying grant requirements. Unionized employers should review collective bargaining agreements for potentially affected repayment or clawback provisions.
- Train HR and recruiting teams. Personnel responsible for offer letters, bonuses, relocation packages, and other employment agreements should understand which repayment provisions remain permissible. Multi-state employers should also coordinate California compliance with stay-or-pay restrictions developing in other jurisdictions, including New York’s Trapped at Work Act.
If you have questions about your employment agreements, or revising such agreements, please contact the author or your favorite CDF attorney.
