For years, the standard California sign-on bonus looked the same: a check on day one and a promise to pay it back if the employee quit within a year or two. Since January 1, 2026, that promise is unlawful unless it’s built exactly the way the Legislature now requires. Assembly Bill 692, signed October 13, 2025 as Chapter 703 of the Statutes of 2025, added Business and Professions Code § 16608 and Labor Code § 926, and it reaches much further than bonuses. Training repayment agreements, quit fees, and replacement hire fees all fall inside it.
Most of the commentary has focused on HR forms. This post covers what the statute actually says, where Inland Empire logistics and healthcare employers are most exposed, and a piece nobody seems to talk about: what happens on the tax side when an employee really does pay a bonus back.
What does AB 692 prohibit?
Section 16608(b)(1) makes it unlawful to include, or to require a worker to sign, a contract term that makes the worker pay the employer, a training provider, or a debt collector if employment ends, that restarts collection on a debt when employment ends, or that imposes any penalty, fee, or cost on the worker for leaving. The definitions are deliberately broad. A “debt” counts whether it’s certain or contingent, so a conditional bonus that becomes repayable on resignation is a debt. The listed penalties include replacement hire fees, retraining fees, quit fees, immigration and visa cost reimbursement, liquidated damages, lost goodwill, and lost profit. “Employer” includes affiliates, contractors, and third-party agents, and “worker” includes applicants and training program participants.
The law applies only to contracts entered into on or after January 1, 2026. Agreements signed in 2025 aren’t voided by AB 692, although they still have to survive older rules like Labor Code § 2802 and § 16600.
When can an employer still recover a sign-on bonus?
Only through the exception in § 16608(b)(2)(D), and only if every condition is met. The payment has to be a discretionary or unearned payment made at the outset of employment that isn’t tied to job performance. The repayment terms must sit in an agreement separate from the offer letter or employment contract. The employee must be told of the right to consult a lawyer and given at least five business days to do it. Repayment can’t carry interest and has to be prorated over the remaining retention period, which can’t exceed two years from the payment date. The employee must be offered the choice to defer the bonus until the end of the retention period with no repayment obligation at all. Finally, repayment can be triggered only by a separation at the employee’s sole election or a termination for misconduct, which the statute ties to the unemployment insurance definition in Unemployment Insurance Code § 1256. A layoff, a position elimination, or a firing for poor fit ends the obligation.
Retention bonuses paid to existing employees are the harder problem. The exception covers payments “at the outset of employment,” so a mid-career retention bonus with a clawback doesn’t fit it. Employers that want the same effect can pay the retention bonus in installments as service is performed, or pay it in full on the retention date. Both approaches avoid a repayment obligation entirely.
Are training repayment agreements dead in California?
Mostly, and the details matter for the Inland Empire. The statute allows tuition repayment only for a “transferable credential,” and it defines that term as a degree from an accredited third-party institution that isn’t required for the current job and is useful for employment elsewhere. The repayment agreement must be separate from the employment contract, state the amount up front without exceeding the employer’s actual cost, prorate over the required service period without acceleration, and require nothing if the worker is terminated other than for misconduct.
Read that definition next to how warehouses in Ontario and Fontana actually train people. Employer-paid commercial driver’s license programs, forklift certifications, and similar certificates aren’t degrees. On the statute’s plain text, a clause making a driver repay CDL school costs after quitting doesn’t fit the tuition exception. The one remaining route is enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards under § 16608(b)(2)(C). Before AB 692, the Court of Appeal had upheld a voluntary training reimbursement agreement in USS-POSCO Industries v. Case (2016) 244 Cal.App.4th 197. For agreements signed in 2026 and later, that decision no longer describes the rules.
| Arrangement | Can it require repayment? | Key conditions |
|---|---|---|
| Sign-on bonus paid at hire | Yes, if every (b)(2)(D) condition is met | Separate agreement, 5 business days to consult counsel, no interest, proration, retention period of 2 years or less, deferral option, only voluntary quit or misconduct |
| Retention bonus paid mid-employment | Treat as no | Pay in installments or on the retention date instead |
| Tuition for an accredited degree not required for the job | Yes, if every (b)(2)(B) condition is met | Separate agreement, stated amount capped at actual cost, proration, no acceleration, nothing owed on non-misconduct termination |
| CDL, forklift, or other certificate training | Likely no on the statute’s text, unless part of a DAS-approved apprenticeship | Certificates aren’t “degrees” under § 16608(a); no court has ruled yet |
| Government loan repayment or forgiveness programs | Outside the statute | § 16608(b)(2)(A) |
| Quit fees, replacement-hire fees, liquidated damages | No | Listed as prohibited penalties |
What happens if an employer gets it wrong?
A noncompliant term is void as against public policy under § 926(a), and § 16608(c) separately declares the contract a restraint on trade that’s void under § 16600. The worker, or a worker representative, can sue individually or on behalf of similarly situated workers for actual damages or $5,000 per worker, whichever is greater, plus injunctive relief and attorney’s fees. Because the statute routes the violation through § 16600, there’s a credible argument that the fee-shifting remedy and its “regardless of where and when the contract was signed” language in § 16600.5 apply as well, which undercuts the idea that an out-of-state choice-of-law clause can save the agreement. Labor Code § 925 already makes those clauses voidable for employees who live and work in California unless the employee was individually represented by counsel. Several employer-side firms also flag Private Attorneys General Act exposure. The bill doesn’t mention PAGA, and no court has decided the question yet.
A $5,000 statutory minimum per worker turns a form sign-on agreement used for 80 seasonal hires into $400,000 of potential exposure before fees. That’s the number that should drive the review.
Can the employer just take the bonus out of the final paycheck?
No. Labor Code § 221 makes it unlawful to collect back wages already paid, and the Court of Appeal held in Barnhill v. Robert Saunders & Co. (1981) 125 Cal.App.3d 1 that an employer can’t set off a debt against final wages. The Labor Commissioner’s deductions FAQ says the same about lump-sum deductions of loan balances. A compliant repayment obligation has to be collected like any other debt: a written demand, a payment plan, or a lawsuit. A business plaintiff in California small claims court is capped at $6,250, which is less than many sign-on bonuses, and suing on a noncompliant agreement invites a § 926 cross-claim.
How is a repaid bonus taxed?
Here’s where an attorney-CPA view helps, because the tax consequences land on both sides and they don’t mirror each other. Consider an Ontario distribution center that pays a forklift supervisor a $12,000 sign-on bonus on March 2, 2026, under a compliant agreement with a 24-month retention period. He resigns at the end of month nine. The most he can owe is the prorated share for the 15 months remaining: 15/24 of $12,000, or $7,500.
His take-home on the bonus was smaller than that. With flat supplemental withholding of 22% federal and 10.23% California, plus Social Security, Medicare, and 1.3% State Disability Insurance, the net check was $7,058.40. He owes back gross dollars, which is more than he ever received.
If he repays in 2026, the employer simply reduces his 2026 wages and adjusts withholding and FICA through Form 941-X, as IRS Publication 15 describes. If he repays in 2027, his 2026 Form W-2 box 1 doesn’t change. The employer issues a Form W-2c reducing Social Security and Medicare wages, refunds his share of FICA after getting his written statement, and recovers both shares on Form 941-X. California’s EDD says employers shouldn’t refund prior-year personal income tax withholding.
For his own return, federal law allows relief only if the repayment is more than $3,000, through the claim-of-right rule in 26 U.S.C. § 1341. At a 12% bracket, the credit method would give him about $900. There’s a caveat worth stating plainly: we haven’t found a ruling applying § 1341 to a bonus clawback triggered by a voluntary resignation, and the IRS could argue he had an unrestricted right to the money when he received it. Repayments of $3,000 or less get nothing federally, because the suspension of miscellaneous itemized deductions is now permanent. California is friendlier. It never adopted that suspension, so a smaller repayment remains a miscellaneous itemized deduction subject to the 2% floor, and Revenue and Taxation Code § 17049 supplies a state claim-of-right rule for larger amounts.
What should California employers do now?
Pull every offer letter, bonus agreement, training agreement, and relocation package template used since January 1, 2026, and sort them by the table above. Move any repayment terms into a stand-alone agreement with the attorney-consultation notice and a deferral election. Replace mid-employment retention clawbacks with installment or cliff payments. Stop using certificate training repayment clauses unless the program runs through a DAS-approved apprenticeship. And coordinate with payroll before the first repayment arrives, because the W-2c and 941-X steps are easy to miss in January.
Frequently Asked Questions
Does AB 692 apply to agreements signed before 2026?
No. It applies to contracts entered into on or after January 1, 2026. Older agreements are still subject to prior California law, including Labor Code § 2802 and Business and Professions Code § 16600.
Can a California employer make a new hire repay a sign-on bonus?
Yes, but only under a separate agreement with a five-business-day attorney review notice, no interest, proration over a retention period of two years or less, an option to defer the bonus, and repayment only after a voluntary resignation or misconduct termination.
Can an employer require repayment of a retention bonus?
Retention bonuses paid after the start of employment don’t fit the statutory exception. Employers typically pay them in installments or on the retention date instead of up front with a clawback.
Can I be required to repay CDL or forklift training costs if I quit?
Generally not under an agreement signed in 2026 or later. The tuition exception covers only accredited degrees. Certificate training repayment is allowed only through a state-approved apprenticeship program.
What are the penalties for a noncompliant stay-or-pay clause?
The term is void, and the worker can recover actual damages or $5,000 per worker, whichever is greater, plus injunctive relief and attorney’s fees, individually or as a class.
Is a repaid sign-on bonus tax deductible?
Federally, only repayments over $3,000 qualify, through the claim-of-right rules, and their application to a voluntary quit isn’t settled. California still allows smaller repayments as a miscellaneous itemized deduction and has its own claim-of-right statute.
How North Star Law Firm Can Help
North Star Law Firm drafts and reviews employment-related agreements for California businesses, including sign-on bonus, tuition, and relocation agreements, and it handles the payroll tax corrections that follow when money comes back. Phillip Zagotti is a California attorney and a CPA, which lets the firm answer the contract question and the W-2c question in the same conversation. See the firm’s contract drafting and review services, its broader business and contract law practice, and its payroll tax work. Employers updating 2026 templates can schedule a consultation to walk through their forms.