Sign-on bonuses, guaranteed compensation packages, relocation stipends, deferred payouts — these are the building blocks of investment banking recruitment and retention. They’re also squarely in the crosshairs of new legislation in California and New York that’s rewriting the rules on clawback agreements.
If you’re a bank structuring offers for lateral hires, or a banker evaluating a new deal, 2026 is a year to pay close attention. Both states have passed laws that significantly limit — and in some cases eliminate — an employer’s ability to claw back upfront payments when an employee leaves before a specified date. And this isn’t happening in a vacuum. At least ten additional states have introduced or advanced similar legislation, and federal regulators have signaled growing scrutiny of these practices. The trajectory is clear: the era of unchecked stay-or-pay agreements is winding down nationwide.
California: AB 692 Takes Effect January 1, 2026
California’s Assembly Bill 692 (codified at Business & Professions Code section 16608 and Labor Code section 926) directly impacts how firms can structure sign-on and retention bonus repayment obligations — two mechanisms that are central to lateral hiring on the Street.
Not Retroactive
AB 692 applies only to agreements executed on or after January 1, 2026. If you signed your offer letter last year with a two-year clawback, that agreement stands as-is. But firms should not rely on legacy templates for new hires after the effective date.
Sign-On Bonuses: Still in Play, But With New Constraints
Sign-on bonuses — the cornerstone of lateral banker recruitment — can still carry repayment obligations, but only if every one of the following conditions is met:
Standalone agreement. The clawback terms must live in a separate document from the offer letter or employment agreement. Burying repayment language in page 14 of an employment contract won’t cut it anymore.
Five-business-day attorney review. The banker must be notified of their right to consult an attorney and given at least five business days to do so before signing. For firms accustomed to fast-moving lateral processes, this introduces a mandatory cooling-off period.
Two-year maximum retention period. The clawback window can’t exceed two years. Banks that have historically used three-year (or longer) repayment schedules for large sign-on packages will need to compress their timelines.
No interest. Firms cannot charge interest on repayment amounts — a provision that directly affects how some banks have structured clawback economics.
Pro-rated repayment. Clawbacks must be proportional to time served. A banker who leaves 18 months into a two-year agreement can only be asked to repay 25% of the sign-on bonus, not the full amount.
Deferral option. The banker must be offered the choice to defer the sign-on bonus until the retention date, at which point there’s no repayment obligation. This effectively gives every lateral hire the option to convert an upfront payment into a back-end earn-out.
Voluntary departure or misconduct only. Repayment can only be triggered if the banker voluntarily resigns or is terminated for cause. If the firm eliminates the desk, downsizes the group, or pushes someone out in a restructuring, it cannot claw back the bonus.
That last point is significant. Banking is a cyclical industry, and headcount cuts are a regular feature of downturns. Under AB 692, firms bear the full cost of sign-on bonuses if they initiate the separation for any reason other than misconduct.
Retention Bonuses: Clawbacks Are Dead
For retention bonuses — upfront payments to existing employees conditioned on staying through a future date — AB 692 bans repayment obligations entirely, regardless of how the terms are structured.
This matters for banks that use retention packages to lock in key talent during integration periods after mergers, or to prevent departures during critical deal cycles. The workaround: pay retention bonuses in installments over time, defer payment until the retention date, or shift to performance-based structures.
Penalties and Enforcement
Non-compliant clawback provisions are void and unenforceable, and exposure goes beyond that. Bankers can bring individual or class claims for actual damages or $5,000 per person (whichever is greater), plus attorneys’ fees. There’s also liability under the Private Attorneys General Act (PAGA). The law makes clear that these remedies are cumulative and do not limit an employee’s rights under other existing laws.
Choice-of-Law Won’t Save You
Can a New York-headquartered bank with California-based bankers simply elect New York law? Probably not. Under Labor Code section 925, choice-of-law provisions that circumvent California protections are generally unenforceable unless the employee was individually represented by their own attorney and consented. And even that exception faces an open question under Business & Professions Code section 16600.5, which declares prohibited restraints unlawful “regardless of where and when the contract was signed.”
New York: The Trapped at Work Act — and Critical Recent Amendments
New York — home to the largest concentration of investment banking talent in the world — has passed its own version of stay-or-pay reform. The Trapped at Work Act (codified as Article 37, N.Y. Lab. Law §§ 1050–55) was signed by Governor Hochul on December 19, 2025, and took effect immediately.
However, and this is critical for banks tracking the law’s development: the New York State Legislature has already passed amendments to the Act. The Assembly passed the amending bill on January 21, 2026, and the Senate followed on January 28. Governor Hochul is expected to sign the amendments, which would make several important changes.
What the Amendments Change
Delayed effective date. The amendments push the effective date back to December 19, 2026, giving employers — including banks — nearly a year to adjust their practices and templates.
Narrowed scope. The original Act covered all “workers,” including independent contractors, externs, interns, volunteers, and apprentices. The amendments narrow this to “employees” only — defined as any person employed for hire.
Bonus repayment explicitly carved out. The amendments create a specific exception for repayment of financial bonuses (such as signing bonuses), relocation assistance payments, or other noneducational incentive payments not tied to job performance. However — and this is a key limitation for banks — repayment cannot be enforced if the employee is terminated for a reason other than misconduct or if the requirements of the job were misrepresented.
Transferable credential exception. A standalone carve-out for tuition reimbursement agreements tied to transferable educational credentials, subject to specific qualifications.
Enforcement factors. More detailed factors for the Department of Labor to consider when assessing penalties, and still no private right of action for employees to sue directly.
The Big Open Question: Deferred Comp and Restricted Stock
Here is what may matter most for Wall Street: the statute is silent about forfeiture or clawback of incentive compensation or restricted stock plans. This is arguably the most consequential unresolved question for the banking industry.
A significant portion of senior banker compensation — particularly at the VP level and above — is paid in deferred cash and restricted stock with multi-year vesting schedules. These arrangements function, in part, as retention tools: leave before the vesting date, and you forfeit the unvested portion. The Act’s prohibition on “employment promissory notes” — agreements requiring an employee to pay the employer if they leave before a stated period — could theoretically sweep in some of these structures, depending on how broadly regulators and courts interpret the law.
Whether traditional deferred compensation forfeiture provisions are treated differently from affirmative repayment obligations is a distinction the Act does not clearly draw. Banks should be watching closely for regulatory guidance, and should evaluate existing deferred comp and equity grant agreements in light of the Act’s language.
Penalties
Violations carry civil penalties of $1,000 to $5,000 per violation. There is no private right of action — enforcement flows through the Department of Labor. However, if an employee successfully defends a lawsuit brought by the employer to enforce a voided promissory note, the employee can recover attorneys’ fees.
A National Trend, Not an Isolated Event
It’s tempting to treat these as two state-specific compliance exercises. But the reality is that California and New York are part of a rapidly expanding national movement. Several states have recently passed or enacted laws to regulate or restrict stay-or-pay provisions — including Pennsylvania and Indiana — and at least ten additional states have introduced or advanced similar bills.
At the federal level, both the Consumer Financial Protection Bureau and the Federal Trade Commission scrutinized these agreements during the Biden administration, citing potential anticompetitive effects. The FTC’s 2024 noncompete rule (currently on hold due to litigation) would have treated aggressive stay-or-pay provisions as de facto noncompetes. While federal enforcement appetite appears to have eased under the current administration, state attorneys general have stepped into the gap — as demonstrated by the multi-state $3.5 million settlement with HCA Healthcare over abusive training repayment agreements imposed on nurses.
For an industry that moves talent across state lines as routinely as investment banking does, the patchwork is getting complicated — and the direction is uniformly toward greater restriction.
What This Means for the Industry
For banks and firms, the implications are structural. Lateral hiring economics need to be re-modeled around pro-rated, two-year-max clawbacks in California and cause-only repayment triggers in both states. Retention bonus structures need a full redesign — installment payments or back-end payouts replace upfront-with-clawback. Offer processes in California need to build in a five-day review period, which may slow lateral hiring timelines. And the silence around deferred compensation and restricted stock in New York’s law demands proactive legal review — banks shouldn’t wait for a test case.
For bankers, these laws create meaningful new protections — particularly around layoffs and involuntary terminations. A banker who gets caught in a downsizing or group reorganization can no longer be hit with a six-figure clawback demand in either state. And the pro-ration requirement in California means the financial risk of moving firms is significantly reduced, even for voluntary departures.
For both sides, the key action item is the same: review your templates now. California’s law is live. New York’s amendments are expected to be signed imminently, giving firms until December 2026 — but banks operating in both states need California-compliant documents immediately.
The days of boilerplate clawback provisions are numbered. The firms that adapt fastest will have a competitive edge in the lateral market — and the ones that don’t are carrying risk that didn’t exist a year ago.