California Closes the Door on “Stay-or-Pay”

California recently enacted two new statutes—section 16608 of the California Business and Professions Code and section 926 of the California Labor Code—targeting “stay-or-pay” contract terms requiring workers to pay money if they leave their employers. Under these new laws, for contracts entered into on or after January 1, 2027, it is unlawful to include such a term in any employment contract, or to require a worker to sign a contract containing one as a condition of employment or a work relationship. Subject to certain limitations, they prohibit any term that (1) requires the worker to pay an employer, training provider, or debt collector for a debt if the worker’s employment or work relationship with a specific employer terminates; (2) authorizes the employer, training provider, or debt collector to resume or start collecting a debt, or to end forbearance on it, upon that termination; or (3) imposes any penalty, fee, or cost on the worker upon that termination.

Section 16608’s definitions are broad. “Debt” includes money, personal property, or any equivalent that is due or owing, or alleged to be due or owing, from a natural person. It expressly includes employment-related costs, education-related costs, and consumer financial products or services, “regardless of whether the debt is certain, contingent, or incurred voluntarily.” “Penalty, fee, or cost” includes, without limitation, replacement hire fees, retraining fees, quit fees, reimbursement for immigration or visa-related costs, liquidated damages, lost goodwill, and lost profit. “Employer” reaches parent companies, subsidiaries, divisions, affiliates, contractors, hiring parties, and third-party agents. “Worker” includes employees and prospective employees, as well as anyone permitted to work for an employer or to participate in another work relationship or training program. A contract that violates section 16608 is considered a restraint on engaging in a lawful profession, trade, or business and is therefore void under Business and Professions Code section 16600. Labor Code section 926 separately declares such a contract or term void as contrary to public policy, subject to the same date limitation.

Section 16608 does not, however, apply to many financial services firms. Section 16608(b)(2)(F) creates a specific exception for contracts for payment of discretionary or unearned compensation to certain financial services professionals as recruitment or retention incentives. This exclusion applies only to contracts between securities broker-dealers, insurance companies, and investment advisers, and their duly licensed and registered agents and representatives. The repayment terms additionally must be set out in an agreement separate from the primary employment contract. The firm’s payment to the agent or representative must be in addition to compensation otherwise payable to the worker in connection with their employment. The worker must be notified of the right to consult an attorney and given at least five business days to obtain advice of counsel before signing. If a repayment obligation remains outstanding after separation and interest accrues on it, the rate may not exceed the applicable federal rate published by the Internal Revenue Service.

The statute contains other exceptions, and each has specific requirements. For white collar employers generally, the most significant is the bonus exception. Section 16608(b)(2)(D) excludes a contract for a discretionary or unearned monetary payment, including a financial bonus, that is not tied to specific job performance. This exception is subject to similarly strict requirements, all of which are set forth in the statute.

Noncompliance carries real consequences. Labor Code section 926 authorizes a worker, or a worker representative, to sue on behalf of that worker, similarly situated persons, or both. A person found liable is liable for the greater of actual damages or $5,000 per worker, plus injunctive relief and reasonable attorney’s fees and costs. Section 16608 further provides that its rights and remedies are cumulative. They do not limit remedies under other laws, including employers’ obligations under Labor Code section 2802, the Labor Code’s worker-classification provisions beginning at section 2775, and the Unfair Competition Law.

For financial services firms and white-collar employers generally, the practical message of the statutory text is clear: any employment-related agreement potentially within section 16608 that is entered into on or after January 1, 2027 and conditions a payment obligation on a worker’s departure should be reviewed now and either brought within one of section 16608’s exceptions or revised.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent advisors, financial professionals, broker-dealers, registered representatives, investors and businesses.
Attorney Joseph M. Mellano can be reached in the firm’s San Diego office at (619) 696-9500.