New stay-or-pay restrictions in California have created confusion over what employers can and cannot enforce in their healthcare planning strategies. Effective retention strategies with low turnover costs now rely more than ever on strong. Flexible employee benefits, supported by an experienced California employee benefits provider.
The top priorities when choosing a new policy include competitive health coverage. Broad provider networks, and personalized plan design to meet each employee’s needs. Yet, if plans cannot meet the compliance standards set by new legislation. Employers may not be able to enforce their own strategies.
This article reviews how California employers can rethink their employee health coverage to be more strategic by clarifying their costs and responsibilities. In 2026 and beyond, flexible benefits will be a core factor in your employees’ decision to commit to your company. Recognizing not only the advantages of new benefits but also the restrictions has never been more significant, making it essential to work with a trusted California employee benefits provider to design competitive, compliant programs that truly support retention.
What Are Stay-or-Pay Restrictions in California?
Stay-or-pay restrictions are enforced by a new section of the California Business and Professions Code, Section 16608. It states that employers cannot create an employment contract that requires repayment of benefits, including sign-on, training, and retention bonuses, after termination of the contract. Employers who pursue terminated employees for repayment can be sued by the employee(s) affected and may be ordered to pay damages, reimbursement for legal fees, and more. Even if the amount was less than $5,000, that is the minimum employers must pay if a claim goes to court.
For employers, this can result in confusion over what compensation can and cannot be enforced. To summarize, except in strict circumstances where a contract may be exempt, all employers are subject to this new restriction on stay-or-pay agreements. Section 16608 gives employees more power to leave their employers with impunity, making it increasingly important for any California employee benefits provider to help employers design compliant compensation and benefits strategies that support retention.
What Employers Should Do About the New Restrictions
In response to these new restrictions, employers need to recognize which costs will now be their responsibility and which they can still pursue in certain circumstances.
The first step in forming a strategic response to the new stay-or-pay restrictions is to review the offers and contracts of existing employees to learn what repayments or benefits were initially promised upon termination. These contracts can then be changed, either to remove the employee’s obligation or add one of the narrow exceptions provided under Section 16608. In either case, existing contracts must be brought into compliance with the new rules.
After amending existing contracts, employers can reassess their current and future offers to confirm they align with the new rules. This involves restructuring their sign-on, training, and employee retention bonuses to avoid unnecessary penalties and lawsuits. However, removing these benefits completely may impact both hiring and retention rates. The goal is to strategically provide benefits to retain employees and maintain a competitive advantage while avoiding unnecessary costs.
Note: Section 16608 applies to contracts entered into, modified, or renewed on or after January 1, 2026. Confirm that any agreements issued going forward comply with the new stay‑or‑pay restrictions.
Why Employees Prioritize Benefits in 2026
According to SHRM, 79% of Gen Z employees look for flexible work options and personalized benefits when choosing an employer. For 62% of these employees, this includes easy access to work-provided mental health resources.
As Gen Z and Millennials become more dominant in the workplace, personalized benefits such as mental health resources will remain significant retention factors. With group health plans, employers can assign different employee groups the care limits and options they need to feel supported, including broad provider options based on individual healthcare policies, without traditional in-network restrictions.
However, group plans and other non-traditional healthcare strategies are only effective when supported by clear communication with employees. To remain loyal to their companies, employees must understand their benefits and how to make the most of them. This includes understanding the individual policies under their new plans. The treatments and medications covered, and the other benefits available to them, regardless of whether they work on-site, remotely, or in a hybrid model.
Are There Exceptions to the New Stay-or-Pay Restrictions?
While most employment contracts must comply with the new restrictions. Section 16608 establishes an exception that allows employers to seek repayment of their discretionary benefits. However, they must meet seven criteria to qualify for this exception. Including having proof of repayment supported by an agreement other than the initial contract. Being in a situation where the employee “voluntarily elects to leave” or “is terminated for misconduct.”
Note: The full list of conditions for exceptions to the stay-or-pay restriction is available here.
Learn the Advantages of Customized Employee Benefits Planning With Local Help
At New City Insurance, our team of employee benefits consultants helps employers customize group health plans. Comply with new California laws governing employee benefits. Our consultants draw on years of experience in HR compliance and strategy to help clients fulfill their obligations. Expand their provider networks, and turn benefits planning into an effective retention strategy for modern employees.
Contact our team to learn more about complying with recent legislative changes in California, clarifying your new responsibilities, and adjusting your employee benefits strategy to attract and retain talent in 2026 and beyond.