May we deduct new hire sign-on bonuses from a final paycheck?

Even if new hires who received a sign-on bonus don’t work out, employers may never make deductions for compensation already paid to employees, including from a final paycheck, unless the deductions are related to a legally compliant commissions plan.

If the sign-on bonus is part of an agreement between the employer and the employee in which the employer offers the benefit in exchange for the employee’s promise to repay the bonus if they leave before a certain time — sometimes referred to as a “stay or pay” agreement — the employer may be able to seek repayment of the bonus, depending on the circumstances.

California law limits employers’ ability to offer these benefits under this type of repayment agreement by making it unlawful to include, in any contract entered into on or after January 1, 2026, a provision or term that does any of the following if the worker’s employment or work relationship with a specific employer ends:

• Requires the worker to pay an employer, training provider or debt collector for a debt.
• Allows the employer, training provider or debt collector to resume or initiate collection of, or end forbearance on, a debt.
• Imposes any penalty, fee or cost on a worker.

The law includes exceptions for certain agreements, including contracts for discretionary monetary payments — such as financial bonuses — provided at the outset of employment that are not tied to specific job performance, as long as the agreement meets the following criteria:

• The terms of any repayment obligation are set forth in a separate agreement from the primary employment contract.
• The employee is notified of their right to consult an attorney regarding the agreement and is provided a reasonable period of not less than five days to seek legal advice before executing the agreement.
• Any repayment obligation for early separation from employment is not subject to interest accrual and is prorated based on the remaining term of any retention period, not to exceed two years from the date the payment was received.
• The worker has the option to defer receipt of the payment until the end of a fully served retention period without any repayment obligation.
• Separation from employment prior to completion of the retention period occurred at the sole election of the employee, or at the election of the employer due to misconduct.

Employers that offer these types of benefits and programs should consult with legal counsel regarding the new law’s impact on their practices and programs to help ensure compliance going forward.