Last year, Assembly Bill 692 limited the use of “stay or pay” contracts by California employers.  These contracts typically pay a signing bonus or an amount for education or training and require the employee to work for a specific period of time over which the bonus or training payment is earned and require the employee to return some or all or some of the bonus or training amount if the employee fails to complete that period of employment.  Unfortunately, AB 692 disproportionately impacted healthcare, trucking and retail, industries that rely heavily on these types of arrangements.  In addition, it was argued that additional time was needed for employers and the collective bargaining process to adapt to the new rules.  Accordingly, AB 1697 was enacted to delay the provisions of AB 692 until January 1, 2027, and to provide certain exceptions to the statute. 

The core language of AB 692, which was enacted as Business and Professions Code section 16608 and Labor Code section 926, remains unchanged.  It still prohibits employers from including a provision in any employment contract, or requiring a worker to execute a contract as a condition of employment, that requires the worker to pay the employer, a training provider, or a debt collector a debt if the worker’s employment terminates.  The prohibition includes contracts that authorize the employer, training provider, or debt collector to resume or initiate collection of, or end forbearance on, a debt upon the termination of employment.  Imposing penalties, fees or costs upon termination of employment is also forbidden.

The exceptions to AB 692 remain, with some additions.  The prohibition on stay or pay contracts does not apply to government loan programs, contracts for recruitment or retention funded by a federal, state or local grant, and contracts for enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards.  Contracts for the leasing, financing or purchasing of residential property are also allowed. 

Contracts for the repayment of tuition for a transferable credit are permitted if the agreement is separate from any employment contract and the credit is not required as a condition of employment.  Further, tuition repayment agreements must specify the repayment amount before the employee signs the contract, and that amount cannot exceed the employer’s cost.  In addition, the contract for repayment must provide for a prorated repayment amount during any required employment or retention period that is proportional to the total repayment amount and the length of the required employment period and does not require an accelerated payment if the worker separates from the employment.  Finally, the tuition contract must not require repayment to the employer by the worker if the worker is terminated, except if the worker is terminated for “misconduct” (which has same meaning as in Section 1256 of the Unemployment Insurance Code).

The exception relating to signing bonuses has been modified to apply to any discretionary or unearned payment and the requirement that the contract be at the outset of employment has been removed.  More specifically, a contract for the receipt of a discretionary or unearned monetary payment that is not tied to specific job performance is allowed if certain conditions are met.  As with a tuition contract, the terms for repayment must be included in an agreement that is separate from any employment contract.  The employee must be notified of the right to consult with legal counsel and provided at least 5 business days to do so prior to the execution of the agreement.  Any repayment obligation for early separation must not be subject to interest and must be prorated based on the term of the retention period, which should not exceed two years from the payment.  The contract must give the worker the option to defer payment until the end of the fully served retention period without any repayment obligation.  Most importantly, a repayment obligation triggered by separation during the retention period must only be for employer termination for misconduct or due to the election of employee.

AB 1697 adds a new exception for contracts between a securities broker-dealer, insurance producer, or investment adviser, and its agents or representatives, inducing such persons to be affiliated with the employer or agreeing to maintain a relationship with the employer.  These contracts are permitted if: the terms of any repayment obligation are set forth in a separate agreement from the primary employment contract; the payment is in addition to compensation that would otherwise be payable to the worker in connection with their employment; the worker is notified that they have the right to consult an attorney regarding the agreement and be provided a minimum of five business days to do so; and any interest that accrues on an outstanding repayment obligation following separation from employment must not exceed the applicable federal rate published by the Internal Revenue Service for federal income tax purposes.

Another added exception applies to repayment obligations arising from voluntary separation of employment that relate to an advanced payment made by the employer for paid time off in excess of a worker’s accrued paid time off.  To comply with the statute, these obligations must be clearly disclosed to the worker separate from the primary employment contract upon the worker’s request to receive advanced paid time off.  Further, the obligation must not exceed 40 hours of accrued paid time off and must not be subject to interest accrual.

As with AB 692, failure to comply with AB 1697 will be deemed an unlawful restraint preventing the worker from engaging in a lawful profession, trade, or business.  A worker subject to such an unlawful contract may bring action or class action on behalf of all those workers similarly situated seeking actual damages or $5,000 per worker, whichever is greater, plus attorney’s fees and costs.

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