California's TRAP Reset: New Exceptions, New Timeline, New Questions

On Governor Newsom’s desk is a bill (AB 1697) that would amend California’s “anti-TRAP” law (AB 692), which restricts employers’ ability to enforce training and retention repayment provisions and other stay-or-pay provisions in employment agreements. The governor is expected to sign these amendments into law. The following summarizes the major changes these amendments would make.

The Delayed (*But Not Really) Effective Date

The most significant amendment is the postponement of the law's effective date by one year. However, the prior law, AB 692, already went into effect on January 1, 2026. Under the amended legislation, the restrictions on stay-or-pay provisions would apply only to covered agreements entered into on or after January 1, 2027. The legislature explained that the delay is intended to provide employers with a transition period to review and modify existing arrangements, account for collective bargaining obligations, and avoid disruption from immediate implementation. 

Employers Already Invested in Compliance Efforts

Unlike many statutory delays, the amendment does not provide additional preparation time for employers that had not yet begun compliance efforts. By the time the legislature postponed the law's implementation to January 1, 2027, many employers had already devoted substantial resources to reviewing and revising stay-or-pay provisions in anticipation of the original January 1, 2026, effective date under AB 692. The amendment therefore creates a unique situation in which employers that had already adjusted their practices must now evaluate whether further revisions are necessary in light of the delayed implementation date and the addition of several new exceptions. Consequently, the legislation may reduce immediate compliance pressure, but it also introduces a new round of strategic decision-making for employers that had already acted to comply with the original law.

A Temporary Liability Safe Harbor for 2026

The amendments create an unusual transition period. The legislature rendered the prior versions of Business and Professions Code section 16608 and Labor Code section 926 inoperative during calendar year 2026 and indicated its intent that claims arising under those provisions during that period be “moot.” For employers, this means that some enforcement risks created by AB 692 are substantially reduced during 2026. However, employers should not view the transition year as complete immunity from challenge. Plaintiffs may try to challenge existing agreements under other legal theories.

Expanded Exceptions for Employers

Although the new proposed law remains restrictive, the amendments added several noteworthy exceptions.

Financial Services Recruiting and Retention Payments

A significant industry-specific exception was added for registered broker-dealers, investment advisers, insurance producers, and related financial services entities. The exception permits repayment obligations arising from discretionary or unearned monetary payments that are intended to induce a worker to join or remain affiliated with a broker-dealer, investment adviser, insurance producer, or related entity. To qualify, the repayment obligation must be documented in a standalone agreement rather than the worker's primary employment contract, the payment must be in addition to ordinary compensation, and the worker must be given at least five business days to consult with counsel before signing. 

The statute also limits post-employment interest charges and confines the exception to relationships involving specified licensed and registered financial services professionals. This exception appears intended to preserve common industry recruiting practices, including forgivable loans and transition compensation arrangements.

PTO Advances

Employers may recover certain PTO advances when an employee voluntarily separates from employment before earning the advanced leave, provided several conditions are satisfied. The repayment obligation must be separately disclosed to the employee at the time the employee requests the PTO advance, rather than being embedded in the primary employment agreement. In addition, the amount subject to repayment may not exceed the equivalent of 40 hours of advanced paid time off, and no interest may accrue on the obligation. 

This exception recognizes that some employers allow workers to borrow against future PTO accruals and seeks to preserve that practice while ensuring that any repayment obligation remains limited, transparent, and proportionate. For employers, the provision provides welcome certainty that reasonable PTO advancement programs can continue without running afoul of California's broader prohibition on stay-or-pay arrangements.

Employer Action Items

Employers should use 2026 as a compliance year rather than a grace period. Specifically, employers should consider:

1. Auditing all existing training repayment agreements and stay-or-pay provisions.
2. Reviewing sign-on bonus, retention bonus, and relocation repayment provisions.
3. Evaluating whether any agreements fit within the amended statutory exceptions.
4. Revising template employment agreements before January 1, 2027.
5. Training human resources and recruiting personnel on the forthcoming restrictions.

Questions Remain

Can employers that already revised their TRAPs for the original January 1, 2026, effective date justify revisiting those agreements in light of the new exceptions? What happens when a TRAP agreement is executed during the 2026 transition period but amended after January 1, 2027? Does the amendment create a new contract subject to the revised statute, or does the original execution date control? Will courts focus on the date the agreement was entered, the date it was amended, the date employment ended, or the date repayment was sought when determining whether the statute applies? How will courts distinguish a lawful repayment obligation from an unlawful penalty that restrains employee mobility? Although AB 1697 provides employers with greater flexibility and several new exceptions, it does not eliminate the uncertainty surrounding TRAP agreements. As employers evaluate their existing arrangements and future workforce strategies, the statute's practical impact will depend on how courts resolve these and other unresolved questions.