Changes to the Business and Professions Code that became effective on January 1, 2026, impact employers and employees alike regarding signing bonuses. In competitive industries, a signing bonus is often used as an incentive to attract sought-after talent. Prior to January of this year, a signing bonus often was contingent upon extracting from the employee a commitment to staying with the company for an agreed-upon amount of time. If the employee left before that time expired, the company’s agreement could allow the company to demand repayment of the entire signing bonus. Now the state of the law in California is entirely different.
On January 1, 2026, California Business and Professions Code § 16608 became effective. It is a “stay-or-pay” statute that sharply restricts an employer’s ability to make an employee repay money or absorb a penalty when their employment ends.
To keep a signing-bonus repayment obligation enforceable for post-2026 agreements, the arrangement must fit a “safe harbor” provision set forth in Section 16608(b)(2)(D). That exception covers a discretionary or unearned monetary payment (including a financial bonus) at the outset of employment that is not tied to specific job performance – but only if all five of the following conditions are met:
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Separate agreement — the repayment terms are set out in a document separate from any primary employment contract.
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Right to counsel — the employee is notified of the right to consult an attorney and given at least five business days to do so before signing.
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Interest-free, prorated, less than 2-year retention — any early-separation repayment bears no interest and is prorated over the remaining term of a retention period that cannot exceed two years from receipt of the payment.
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Deferral option — the worker may elect to defer receipt until the end of a fully served retention period, with no repayment obligation.
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Qualifying separation — the early separation was at the employee’s sole election or was “for cause” due to the employee’s misconduct.
The newly enacted Code section makes it clear that repayment of a signing bonus can never be accelerated or be demanded in full if the employee leaves partway.
Under the new law, a signing-bonus repayment or clawback provision that does not fit the above statutory exception is void and unenforceable if entered into on or after January 1, 2026. And requiring the employee to agree to such a provision triggers liability under Labor Code Section 926 (a companion to Section 16608), which creates a private right of action for the employee to pursue individual claims or a representative claim on behalf of “similarly situated” employees. The penalty for violating Section 16608 is actual damages suffered by the employee or $5,000 per employee (whichever is greater) along with injunctive relief and reasonable attorney’s fees and costs.
In sum, if your business extends signing bonuses to new hires, have legal counsel immediately review the written agreement so you can ensure compliance with new and restrictive laws in California.
Please contact Ros Lockwood at [email protected] or (949) 975-7500 if you have any questions about this article, or any other related matter.