California recently enacted Section 16608 of the California Business and Professions Code, which bans agreements that require employees to pay a “penalty, fee or cost” upon termination, effective January 1, 2026. 

Bonuses that are subject to repayment will be prohibited by this new law, unless they satisfy the following requirements: 

(1) The bonus is a discretionary or unearned payment made at the outset of employment and not tied to specific job performance;

(2) The repayment terms are set forth in a separate agreement from the primary employment contract;

(3) The employee is notified of the right to consult with an attorney regarding the agreement and is provided with a reasonable time (at least five business days) to obtain advice of counsel prior to executing the agreement;

(4) The repayment obligation for early separation is not subject to interest accrual and is prorated based on the remaining term of any retention period, which may not exceed two years;

(5) The worker has an option to defer receipt of the payment to the end of the retention period without any repayment obligation; and

(6) Repayment due to separation prior to the end of the retention period may only be required if the separation was at the sole election of the employee, or at the election of the employer for “misconduct” (as defined elsewhere in California regulations).

Arrangements that don’t satisfy these rules will be unenforceable and expose employers to civil damages, including claims for attorneys’ fees and costs. 

Bonuses subject to repayment are common in some industries (such as banking and technology). Often, these arrangements are used for signing or relocation bonuses and require repayment of the bonus (or a portion of the bonus) if the employee leaves without good reason or is terminated with cause before completing a specified period of employment (generally two years). Some aspects of the new California law align reasonably well with existing commercial practices or may require only modest design adjustments (e.g., items (1), (4) and (6) above); other aspects are merely formalities that will require administrative changes, but that won’t undermine the fundamental nature of the arrangements (e.g., items (2) and (3)). Employers will need to move quickly to adapt their programs to these requirements for employees subject to California law.