California Delays Anti-Clawback Law, Expands Bonus Exception, and Creates New Exceptions for Financial Services Professionals

On September 30, 2026, California enacted AB 1697, a bill that delays the effective date of Business and Professions Code Section 16608 (California’s anti-clawback law) to January 1, 2027, and expands the law’s exceptions. Employers that use sign-on, retention, or other repayable incentives should review their agreements and templates now.  

Background: Section 16608

In 2025, California passed AB 692, which added Section 16608 to the Business & Professions Code.  Section 16608 initially applied to contracts entered into on after January 1, 2026, and generally prohibited employers from including in an employment contract, or requiring a worker to sign as a condition of employment, any agreement that, upon termination of employment, (1) requires the worker to repay a debt to the employer, a training provider, or a debt collector; (2) permits collection of a debt to begin or resume, or forbearance to end; or (3) imposes any penalty, fee, or cost on the worker.

The statute as originally enacted included limited exceptions for:

• Contracts entered into under any loan-repayment assistance program or loan-forgiveness program provided by a federal, state, or local governmental agency
• Contracts related to the repayment of the cost of tuition for a transferable credential (i.e., degrees from accredited institutions not required for the job), provided that (1) the repayment agreement is separate from the employment contract; (2) the repayment amount is specified in advance and does not exceed the employer's actual cost; (3) repayment is prorated over time without acceleration clauses; and (4) repayment is waived if the worker is terminated for reasons other than misconduct
• Contracts related to enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards
• Contracts for the receipt of a discretionary or unearned monetary payment, including a financial bonus, at the outset of employment that is not tied to specific job performance (the Bonus Exception), subject to notice, form, and substantive limitations described below
• Contracts related to the lease, financing, or purchase of residential property, including, but not limited to, a contract pursuant to the California Residential Mortgage Lending Act (Division 20 of the Financial Code, commencing with section 5000)

To qualify for the Bonus Exception, the following requirements applied:

• The terms of any repayment obligation must be set forth in a separate agreement from the primary employment contract.
• The worker must be notified of the right to consult an attorney regarding the agreement and be provided with a reasonable period of not less than five business days to obtain legal advice before executing the agreement.
• Any repayment obligation for early separation from service may not be subject to interest accrual and must be prorated based on the remaining term of any retention period, which may not exceed two years from the date of receipt of payment.
• The worker has the option to defer receipt of the payment until the end of a fully served retention period, thereby avoiding any repayment obligation.
• The separation from service prior to the end of the retention period must be at the sole election of the worker, or at the election of the employer for cause based on the worker’s misconduct (as defined in Section 1256 of the Unemployment Insurance Code).

In practice, the original version of Section 16608 presented significant challenges for employers. For many companies, the limitations to sign-on bonuses were particularly concerning, as it excluded retention bonuses, anniversary incentives, and other incentive payments that are commonly used to attract and retain talent. The absence of a tailored exception for financial services professionals — who often receive substantial upfront compensation with repayment obligations tied to regulatory licensing requirements — also left many firms uncertain about how to structure compliant agreements.

Key Changes Under AB 1697

The newly passed AB 1697 addresses many of the practical limitations employers encountered under the original statute. Below, we summarize the key changes:

Delayed effective date. Section 16608 now takes effect January 1, 2027, providing employers using outdated forms of agreement additional time to comply. All agreements entered into before January 1, 2027, that do not meet the original requirements, including those executed in 2026 while Section 16608 was effective, may remain enforceable.

Expanded Bonus Exception. The Bonus Exception has been expanded to cover incentives entered into with current employees. Specifically, the requirement that the agreement be made “at the outset of employment” has been stricken. Thus, employers now have a stronger argument that retention bonuses, mid-employment incentives, and similar payments not tied to job performance qualify, provided all the exception’s other conditions are met.

New exception for financial services professionals. A new exception has been added that is similar to the Bonus Exception but applicable to licensed securities, insurance, and investment advisory professionals. Two of the requirements (a separate agreement and notice of the right to consult an attorney) mirror the Bonus Exception; however, the new exception does not require that the worker be offered the option to defer the payment, does not restrict the reasons for separation that can trigger repayment, and allows for limited interest. The specific requirements are:

• The terms of any repayment obligation are set forth in a separate agreement from the primary employment contract.
• The payment from the employer to the worker is in addition to compensation that would otherwise be payable to the worker in connection with their employment.
• The worker is notified of the right to consult an attorney regarding the agreement and is provided with a reasonable period of not less than five business days to obtain legal advice before executing the agreement.
• If a repayment obligation remains outstanding following separation from employment and interest accrues after separation, the interest rate may not exceed the applicable federal rate published by the Internal Revenue Service for federal income tax purposes.
• The contract is between a securities broker-dealer, insurance producer, or investment adviser (including its affiliates) and its agents or representatives who are:
  • registered with the United States Securities and Exchange Commission or the Financial Industry Regulatory Authority;
  • licensed by the State of California under Chapter 2 (commencing with Section 25210) or Chapter 3 (commencing with Section 25230) of Part 3 of Division 1 of Title 4 of the Corporations Code; or
  • licensed by the State of California under Section 1626 of the Insurance Code.

Government recruitment and retention bonuses. The exception for federal, state, or local government agency recruitment or retention bonuses has been modified to clarify that employee repayment obligations must comply with grant requirements and may not exceed the service obligations the grant requires.

Next Steps

AB 1697 offers relief to employers that entered into non-compliant agreements in 2026 and provides new flexibility for the use of retention and other incentives that Section 16608 did not originally contemplate.

With the new effective date of January 1, 2027, less than three months away, employers should:

• audit existing repayment and clawback agreement forms;
• assess whether each form fits within an exception as amended; and
• update offer letter, bonus, and retention agreement templates before January 1, 2027.

The information contained in this publication should not be construed as legal advice. If you have questions about this Client Alert, please contact your usual firm representative