New California Laws 2026
AB 692: Redefines employee contracts and raises new legal questions
By Ryne C. Posey and Anthony E. Guzman II C alifornia banned most traditional non-com- petes years ago. But the broader dialogue over employee mobility never really stopped. As the labor market evolved, employers experimented with a range of alternative strategies to incentivize employee retention and protect other interests—in- cluding the use of contractual arrangements that didn’t bar competition outright but attached financial consequences (or incentives) that arguably made leaving less desirable in practice. Over time, these approaches became more common as employers tried to strike a balance between workforce stability and a shifting legal landscape. AB 692 seeks to clarify which employer retention tools remain acceptable and which the state now views as de facto non-competes. Effective Jan. 1, 2026, unless a limited exception applies, companies may no longer require California employees and oth- er individual services providers to sign contracts that trigger any of the following when the work relation- ship ends: Repayment of a “debt”: meaning “any money, personal property, or their equivalent that is [or is alleged to be] due and owing [from the worker], re- gardless of whether the debt is certain, contingent, or incurred voluntarily”; or Imposition of a “penalty, fee, or cost”: includ- ing, but “not limited to,” any “retraining fee, replace- ment fee, quit fee, reimbursement for immigration or visa-related costs, liquidated damages, lost goodwill, and lost profit.” Few exceptions exist—namely: (a) contracts en- tered before Jan. 1, 2026; (b) sign-on bonuses with strict safeguards and two-year retention caps; and (c) certain bona fide tuition reimbursements, gov- ernment sponsored loans, registered apprenticeship agreements and residential property contracts. In practice, AB 692’s reach may be far broader than intended, with the new law raising several unan- ticipated issues, including: Incentive arrangement overreach: AB 692 also places a host of relatively common repayment pro- visions that historically aligned employee-employer incentives on the chopping block, including reloca- tion reimbursements, technology and equipment stipends, mid-employment retention bonuses and
restricted equity awards subject to clawback on early departure. Doctrinal ambiguity: AB 692’s restriction on im- posing “penalties, fees, and costs” for separations of employment may also force courts to re-evaluate cer- tain long-settled doctrines that allowed time-based vesting conditions for compensation, including an- nual bonuses, commissions and even certain equity arrangements conditioned on continued employ- ment through a later payout date. Where the only operative condition is remaining employed through a certain date, litigants may seek to recast these pro- visions as prohibited penalties in the wake of AB 692. Corporate landmines: Acquirers, affiliates and other parties that assume executive contracts with embedded incentive compensation arrangements may inadvertently strip those agreements of pro- tection under AB 692’s grandfather clause, while parties implementing new incentive compensation arrangements on and after Jan. 1, 2026 will now confront a host of new statutory guardrails that may require implementing new arrangements with less retentive effect or that employees may just perceive as less attractive. Ultimately, California is once again forcing em- ployers to revisit the architecture of their contracts. But AB 692 does more than retire unfair practices that hinder employee mobility; it injects new ambi- guities that may actually weaken compensation ar- rangements long embraced by both employees and employers. Ryne C. Posey is a partner, and Anthony E. Guzman II is an associate at Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates.
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