California Goes After Sign-On, Retention Clawbacks

California employers will lose most of their ability to require workers to repay sign-on and retention bonuses starting January 1, 2026. 

Why it matters: The new law significantly restricts clawback provisions commonly used by employers, especially for retention bonuses for existing employees. 

The basics: Assembly Bill 692 prohibits employers from: 

• Requiring workers to repay them (or training providers) for training-related costs if/when the work relationship ends. 

• Requiring workers to repay retention or sign-on bonuses to the employer if they decide to leave ahead of the agreed upon term expiration, unless the following conditions are met:  

• The bonuses are agreed to prior to the start of employment in a separate agreement from the employment contract; 

• Employees are given five business days to review with an attorney; 

• The retention period is capped at two years maximum; 

• Repayment obligations are not subject to interest accrual; 

• The repayment obligation is prorated based on the remaining term of any retention period;  

• The employee is offered the option to defer payment until the retention date; and 

• The employee has voluntarily resigned – employers cannot recoup payment where the worker has been terminated (except for certain misconduct causes as outlined in the law).  

No more retention bonus clawbacks for existing employees: The most alarming aspect of the law is its failure to provide any exception for retention bonuses made to existing employees (rather than at the outset of employment).  

• While the full scope of the law is still unclear, as written it would appear to mean that retention bonuses for existing employees can no longer include repayment obligations under any circumstances.  

• Companies would instead have to either pay in installments over time or defer payment until the retention date. 

The stakes: Violations expose employers to individual and class action lawsuits, $5,000 penalties per employee (whichever is greater than actual damages), plus attorney fees and Private Attorneys General Act claims. 

Employer considerations:  

• The law only applies to agreements signed on or after January 1, 2026.  

• Employers should review and revise their bonus agreements now and consider finalizing any non-compliant arrangements before year-end.  

• Many questions remain unanswered, including whether the law applies to equity awards or executives with attorney representation.