Offer Letter Clauses Are Now a Class Action Risk: What California Employers Must Fix Immediately

Effective January 1, 2026, California’s AB 692 bans most “stay-or-pay” clauses in employment and offer letters. Employers can no longer include repayment obligations for discretionary upfront payments - including sign-on bonuses, relocation reimbursements, visa-related fees, and training costs - in standard offer letters or employment agreements.

With the law now in effect, outdated templates put employers at immediate risk of litigation, including class action lawsuits and recovery of attorney’s fees, creating a strong incentive for plaintiff-side counsel to act.

Why This Change Matters

AB 692 prohibits clauses that require employees to repay money or incur penalties if their employment ends. Even common clauses buried in offer letters can trigger individual or class action claims, exposing employers to statutory damages and costly attorney’s fees.

Restructuring Discretionary Payments

Certain repayment provisions remain enforceable only if properly structured and not included in offer letters:

• Must be a standalone written agreement;

• Repayment must be time-limited and prorated;

• Employees must receive clear notice about the opportunity to consult counsel and a mandatory period of time to do the same;

• Employees must have the option to defer receipt of the payment until the retention period ends without triggering repayment;

• Repayment obligations must be reasonable and non-punitive;

• Repayment can only be triggered by voluntary resignation or misconduct, not layoffs or other terminations.

These measures will allow employers to continue offering certain discretionary upfront payments while reducing AB 692-related risk.

Class Action and Litigation Risk

AB 692 gives employees the right to challenge prohibited repayment clauses, and the use of standardized templates across multiple hires greatly increases the risk of class action lawsuits. Employers should be aware of:

• Class action potential: One non-compliant clause applied across multiple employees can trigger a class action.

• Attorney’s fees: Employees who prevail can recover fees and costs, making even modest claims financially attractive to plaintiffs’ counsel.

• Statutory damages and injunctions: Minimum $5,000 per employee, plus potential court orders to remove unlawful clauses.

Even a single outdated template, if used broadly, could expose an employer to individual or class action litigation, highlighting the critical need for immediate action.

Immediate Steps for Employers

1. Audit all offer letters and employment templates to identify repayment clauses.

2. Remove prohibited terms from offer letters and employment agreements.

3. Create separate agreements for any discretionary upfront payments you still want to recoup, ensuring they comply with AB 692 exceptions.

4. Document compliance and update HR and recruiting processes to prevent inadvertent violations.

   
   

How ExecutiveGC Can Help

ExecutiveGC provides senior-level, practical legal guidance to help employers:

• Review and restructure discretionary payment agreements;

• Update offer letter and employment templates to comply with AB 692;

• Reduce class action and attorneys fee exposure;

• Preserve strategic talent retention strategies.

  
  

Bottom line: AB 692 is now the law. Employers should act immediately to update offer letters and related templates to reduce the risk of costly litigation triggered by common repayment clauses. For help reviewing and updating your templates, contact Jackie Piscitello at jackie@executive-gc.com.

About the author: Jacqueline Piscitello is a Founding Partner of ExecutiveGC, LLP, where she and her team provide practical, business-focused legal counsel to growing companies.

This article is for general informational purposes and does not constitute legal advice.