Mandatory fees added to customer checks have become one of the more aggressively litigated areas in California consumer and employment law. Restaurants are the most visible target, but the issue reaches any California business that adds a line-item charge to customer invoices — event venues, hotels, salons, fitness studios, delivery services, and beyond. The framework is layered: local ordinances, a statewide gratuity statute interpreted broadly by the Court of Appeal, and the Consumers Legal Remedies Act as amended by SB 478 and SB 1524. Here are five considerations for California employers.

1. Raising menu (or service) prices is the cleanest path.

The cleanest legal approach is generally to raise prices rather than add a separate fee to customer checks. Price increases are not subject to local service-charge ordinances, are not covered by the gratuity analysis under O’Grady v. Merchant Exchange Productions, Inc. (2019) 41 Cal.App.5th 771, and avoid the disclosure traps of SB 478. Economically, the approach achieves the same result as an across-the-board house-retained fee without the regulatory exposure. The Santa Monica City Attorney’s office has publicly identified price increases as the safest path.

Bottom line: If the goal is to recover costs across the board, building those costs into the listed price is materially less risky than collecting them through a separate fee.

2. Several California cities require mandatory service charges to be paid to employees — and the coverage rules reach beyond city-based employers.

Santa Monica (SMMC § 4.62.040), West Hollywood (WHMC § 5.130.050), Berkeley (BMC § 13.99), and Oakland (OMC § 5.92), for example, each have ordinances requiring mandatory service charges to be distributed to non-managerial employees who contributed to the chain of service. Santa Monica treats violations as strict liability. Both Santa Monica and West Hollywood apply their ordinances to any employee performing as little as two hours of work per week within city limits, regardless of where the employer is headquartered — a coverage trigger that catches employers operating across Los Angeles County. West Hollywood goes further on healthcare-related surcharges: within seven days of collection, the surcharge revenue must either be deposited into employee-controlled accounts (FSAs, HSAs, or POP cafeteria plans) or paid directly to employees as wages, and the employer cannot retain any portion.

Bottom line: Employers with operations in any of these jurisdictions should assume that mandatory service charges will need to be distributed to non-managerial employees and must understand these heightened regulations.

3. The O’Grady “reasonable customer” test still applies statewide.

The O’Grady decision held that a mandatory service charge can constitute a “gratuity” under Labor Code § 351 — meaning the employer must distribute it to non-managerial employees — if a reasonable customer would believe the charge is for the server’s work. The court rejected the prior view that mandatory service charges are categorically not gratuities, and emphasized that the analysis turns on the customer’s reasonable expectations rather than the label. Plaintiffs’ firms have since filed putative class actions and PAGA claims against California restaurants and hospitality employers asserting that house-retained fees are gratuities under O’Grady. The risk is not limited to jurisdictions with local ordinances.

Bottom line: O’Grady establishes a statewide gratuity exposure for any mandatory fee a customer might reasonably believe is for the employee’s service — regardless of what the fee is called or where the business is located.

4. If a fee is retained, the label and structure have to do real work.

A business that adds a mandatory fee and retains it must navigate both the local ordinances (where applicable) and the O’Grady test. Labels suggesting the fee compensates employee service — “service charge,” “auto-gratuity,” “kitchen appreciation fee,” “living wage fee,” “hospitality fee,” “healthcare surcharge,” “benefits surcharge” — fall directly within the local ordinance definitions and are highly likely to be treated as gratuities under O’Grady. A retained fee has a meaningful chance of surviving challenge only if (i) it is described with specificity as offsetting a defined non-labor cost (for example, credit card processing or a specific non-labor regulatory cost), (ii) it is actually used for that stated purpose — not commingled with payroll, (iii) it is disclosed clearly and conspicuously before the customer orders, on menus, online ordering pages, and receipts, and (iv) the disclosure expressly disclaims being for employee services. Internal accounting should track fee revenue against the disclosed purpose.

Bottom line: A retained fee is defensible only if the label, the disclosure, the actual use of the funds, and the recordkeeping all align — the label alone will not save it.

5. SB 478 and SB 1524 add a separate statewide transparency layer that reaches beyond restaurants.

Effective July 1, 2024, SB 478 amended the Consumers Legal Remedies Act (Civ. Code § 1770(a)(29)) to prohibit advertising or listing a price that does not include all mandatory fees and charges, often referred to as drip pricing, with limited exceptions for government taxes and reasonable shipping. The law applies to virtually every California business that sells goods or services to consumers — not just restaurants. Restaurants, bars, and certain food businesses received a carve-out under SB 1524, but only if mandatory fees are clearly and conspicuously displayed with an explanation of their purpose on any menu, advertisement, or other display showing the price of a food or beverage item. As of July 1, 2025, the “clear and conspicuous” disclosure must meet the technical standards in Civil Code § 1791(u) — text in larger or contrasting type, font, or color, or otherwise visually set off from the surrounding text. Violations of SB 478 can be enforced as CLRA claims, including on a class basis, with damages of the greater of actual damages or $1,000 per violation, plus restitution, punitive damages, and attorneys’ fees.

Bottom line: Any California business — restaurant or otherwise — adding mandatory fees to customer transactions should review its pricing displays, online checkout flows, and menu disclosures against SB 478 and the July 1, 2025 technical requirements to avoid a CLRA class action layered on top of the underlying service-charge exposure.

Mandatory fees are now subject to a complex analysis in California: local service-charge ordinances, the statewide O’Grady gratuity test under Labor Code § 351, and the SB 478/SB 1524 transparency framework under the CLRA. Each layer carries its own private right of action. Employers should periodically review their customer-facing fee structures, disclosures, and internal accounting against this framework.

On April 1, 2026, the Ninth Circuit handed California employers a meaningful win in O’Dell v. Aya Healthcare Services, Inc., No. 25-1528. The court reversed a Southern District of California ruling that had used a procedural doctrine—non-mutual offensive collateral estoppel—to invalidate arbitration agreements for more than 250 opt-in plaintiffs based on two prior arbitrator decisions finding the employer’s agreements unconscionable.

The decision matters because it closes off a tactic that could have allowed a small number of adverse arbitration outcomes to wipe out an employer’s entire arbitration program in a collective or class action. For California employers who have invested in arbitration agreements as a risk-management tool, the ruling reaffirms a foundational principle: each arbitration agreement stands or falls on its own terms.

Here are five practical takeaways for California employers.

1. Arbitration agreements must be evaluated individually, not in bulk.

The district court in O’Dell allowed two arbitrator rulings—each involving a different employee and a different arbitrator—to preclude Aya from enforcing hundreds of other arbitration agreements signed by opt-in plaintiffs. The Ninth Circuit rejected that approach, holding that the Federal Arbitration Act requires courts to enforce arbitration agreements according to their terms and that applying non-mutual offensive collateral estoppel in this context conflicts with the FAA’s core principle of consent.

For California employers facing collective or class actions—particularly under the California Labor Code —this means that a single adverse arbitration ruling against one employee does not automatically bind the employer as to every other employee. Each agreement is its own contract, and each employee consented to arbitration on an individualized basis.

2. Delegation clauses remain powerful.

The Aya arbitration agreements contained delegation clauses that sent questions of the agreement’s validity to the arbitrator rather than the court. That structure was central to what happened next: when the initial four plaintiffs challenged the agreements, arbitrators—not judges—decided the unconscionability questions.

California employers should consider having clear, express delegation clauses in their arbitration agreements. A well-drafted delegation clause keeps gateway issues (validity, enforceability, scope) in the arbitral forum and reduces the number of issues courts can use to deny a motion to compel. O’Dell is a reminder that the architecture of the agreement—not just the substance—matters.

3. Split arbitrator results do not doom the rest of the program.

In Aya’s case, the arbitrators divided two-to-two on whether the agreements were unconscionable. The district court gave preclusive effect only to the two decisions finding the agreements invalid—turning a split into a sweeping defeat. The Ninth Circuit correctly observed that this approach transformed individualized arbitrations into something like an unauthorized bellwether class action that the parties never agreed to.

The lesson for employers: inconsistent arbitrator outcomes are a fact of life in large workforces. O’Dell confirms that adverse decisions in a handful of arbitrations are not a basis for invalidating agreements with other employees. Employers can continue to enforce their agreements on an individual basis, even when some arbitrators reach unfavorable results.

4. The ruling does not cure substantively flawed arbitration agreements.

O’Dell is a procedural win. It does not insulate employers from the substantive unconscionability challenges that remain the bread-and-butter of plaintiffs’ attacks on arbitration in California. The Armendariz factors can still apply, and California courts continue to scrutinize fee-splitting provisions, venue clauses, limitations on remedies, discovery restrictions, and presentation issues—as recent cases like Fuentes v. Empire Nissan (arbitration agreement in nearly unreadable font) illustrate.

Two of the four arbitrators in O’Dell found Aya’s agreements unconscionable because of their fee and venue provisions. That is a reminder that even a structurally sound arbitration program can be undone by one-sided terms. Employers should not read O’Dell as a reason to delay a substantive review of their agreements.

5. California employers should use this as a reminder to audit their arbitration programs.

Now is a good time for California employers to conduct a focused audit of their arbitration agreements. Key items to review include:

  • Consider implementing a delegation clause assigning gateway issues to the arbitrator.
  • Fee allocation consistent with Armendariz—the employer bears the costs unique to arbitration.
  • A reasonable, neutral venue that does not impose unfair burdens on the employee.
  • Mutual remedies and mutual coverage (both sides bound to arbitrate).
  • A severability or savings clause that allows the agreement to survive if a specific provision is found unenforceable.
  • Presentation that passes a readability check—legible font, clear headings, separate signature, and no buried consent.
  • A carve-out framework that properly addresses PAGA and sexual harassment claims consistent with current California and federal law.

The Ninth Circuit has reaffirmed that arbitration programs built on individualized consent will be enforced on an individualized basis. Employers who pair that protection with a substantively defensible agreement are in the strongest possible position heading into the remainder of 2026.

Five AI Strategies California Employers Should Be Executing Right Now

AI is not coming to your workplace. It is already there. Your employees are using it — on personal accounts, on free tools, and in ways your current policies almost certainly do not address. The California employers who are winning the next decade are not the biggest or the best-funded. They are the most adaptive.

Here are five things you should be doing right now.

1. Own the Platform. Own the Data.

The single most important AI decision you will make is which platform your employees use — and who controls the data flowing through it.

When employees use personal AI accounts — a personal ChatGPT, a personal Gemini subscription, a free AI tool they found online — to perform company work, several things happen simultaneously:

  • Your confidential information, client data, and trade secrets are submitted to a third-party AI provider with no privacy controls benefiting you.
  • The outputs generated belong to that employee’s personal account — not the company.
  • If litigation arises, you cannot audit what was submitted or generated. You are flying blind.
  • You are building the AI company’s data asset. Not yours.

The fix is straightforward: select an enterprise-grade company AI platform, deploy it actively, require employees to use it for business tasks, and limit AI expense reimbursements to tools on your approved platform only. Under California Labor Code Section 2802, if you require AI tool use, you need to provide the tools. So provide them — and make clear those are the required tools.

Bottom line: If your employees are using AI and you don’t own the platform, someone else owns your data.

2. Treat Your AI Policy as a Living Document — Not a One-Time Project.

Most employer AI policies are already outdated the day they are published. That is not a flaw — it is the nature of AI. The technology is evolving monthly, and so is the California regulatory landscape around it.

What your AI policy needs to do right now:

  • Designate which AI tools are approved and prohibit use of all others for company business.
  • Make clear that employees have no expectation of privacy on the company AI platform — all prompts, inputs, and outputs are company property.
  • Require human review before any AI-generated content is used in an employment decision.
  • Address data security — which categories of information employees may and may not submit to AI tools.
  • Include a violation and discipline provision with real teeth.

But here is the part most employers miss: build in a quarterly review. California’s Civil Rights Department is already scrutinizing automated decision tools in hiring. AB 331 and related legislation signal that mandatory bias audit requirements are coming. The CCPA/CPRA raises profiling questions most employers have not yet considered. Your policy from six months ago may already have compliance gaps.

Bottom line: An AI policy is not a checkbox. It is an operational document that needs a dedicated owner and a quarterly update schedule.

3. Use AI Defensively — Before the Plaintiff’s Attorney Does.

California employers focus so much on AI as a productivity tool that they overlook its most powerful application: litigation risk reduction.

Think about what AI can flag in real time if you deploy it with that goal in mind:

  • Missed meal and rest break patterns before they become PAGA claims.
  • Overtime anomalies and off-clock work indicators that surface exposure before discovery.
  • Pay equity outliers that identify disparities before a discrimination claim is filed.
  • Leave of absence gaps where the interactive process was not followed.
  • Accommodation request patterns that may indicate a systemic failure.

Under PAGA reform, employers who can demonstrate “reasonable steps” toward compliance get meaningful litigation protection. Using AI to continuously audit your own practices — and acting on what it finds — is exactly the kind of documented, systematic compliance activity that builds that defense.

Your employees are generating compliance data every single day. AI can read it faster than any HR team. The employers who use that data proactively will catch problems that currently only surface when a complaint lands.

Bottom line: AI can be your early warning system for California employment law liability. That is not a future capability. It is available today.

4. Make AI Fluency a Talent Strategy — Not Just a Tech Initiative.

The employers building the deepest AI moats are not doing it through technology alone. They are doing it by hiring for AI fluency, developing it in their existing workforce, and recognizing it in performance management.

What this looks like in practice:

  • Add AI competency expectations to job descriptions — not just for tech roles, but for HR, operations, marketing, and management.
  • Build AI training into onboarding — every new hire should understand the company platform, the policy, and the approved use cases before their first week is over.
  • Include AI skill development in performance reviews — employees who invest in AI fluency are building organizational capacity and should be recognized for it.
  • Identify two or three high-value AI use cases specific to your business and make those the initial wins that build cultural momentum.
  • Train managers first — supervisors set the cultural tone. If they are not using AI confidently and correctly, their teams will not either.

The employers who treat AI as a cultural initiative — not just an IT rollout — get faster adoption, better outcomes, and a workforce that iterates on AI capabilities rather than resisting them.

Bottom line: The competitive moat is not the AI tool. It is the organization that learns to use it faster than everyone else.

5. Audit Your Vendors, Contracts, and Insurance.

Most employers have focused on internal AI policy and missed three external issues that carry significant legal and financial exposure.

Vendor contracts. Your company AI platform vendor has a data processing agreement that almost certainly defaults to their terms — not yours. Review it for: who owns your data and prompts, whether your usage trains their models, data retention and deletion practices, and breach notification obligations. This is a leverage moment most employers walk past without stopping.

Client and supplier contracts. If your employees are using AI to deliver work product to clients, your client contracts likely say nothing about it. Clients may have AI restrictions, confidentiality requirements, or disclosure expectations. Your supplier contracts have the same gap from the other direction. Add AI use provisions before a contract dispute forces the issue.

Insurance. Most insurance policies were written before AI was a meaningful issue. Check whether your coverage addresses AI-related claims, such as data breaches involving AI platforms. Some insurers are now asking AI-specific underwriting questions. Getting ahead of that conversation is better than discovering a coverage gap after a claim.

Bottom line: The legal exposure from AI is not just internal. Check your vendor contracts, your client agreements, and your insurance policy.

The Bottom Line

The California employers who will lead the next 15 years are not waiting for the right moment to engage with AI. They are building the platform, writing the policy, training the team, auditing the risks, and iterating — right now, this quarter, before the window closes.

Agility is the moat. The employers who move first get the data advantage, the talent advantage, and the compliance advantage. The ones who wait spend the next decade playing catch-up at higher cost with fewer options.

If your organization does not yet have a written AI policy, a designated company AI platform, and a training program for your team — those are the three places to start. This week.

Posting a job opening sounds straightforward — but in California, it comes with a growing list of legal requirements that many employers overlook. From pay scale disclosures to salary history prohibitions, the rules around job postings have evolved significantly in recent years and continue to be refined by legislation, agency guidance, and litigation. Getting these right from the start is not just about compliance — it signals to applicants and regulators alike that your company takes its obligations seriously and reduces your exposure to enforcement actions and claims.

Here are five things California employers need to know before posting their next open position.

1. All California Employers Must Be Prepared to Disclose Pay Scales Upon Request

California’s pay transparency framework is primarily codified at Labor Code Section 432.3. The statute has two distinct origins. AB 168 (effective January 1, 2018) first prohibited employers from asking applicants about salary history and required employers to provide pay scale information upon reasonable request. SB 1162, signed by Governor Newsom on September 27, 2022 and effective January 1, 2023, significantly expanded those obligations — adding a mandatory posting requirement for larger employers, extending disclosure rights to current employees, and introducing a record retention requirement.

Under Labor Code §432.3(c)(1), all California employers — regardless of size — must provide the pay scale for an open position to any applicant who makes a reasonable request. Under §432.3(c)(2), current employees have the right to request the pay scale for any position they currently hold or are seeking. Employers must maintain records of job titles and wage rate history for each employee throughout employment and for three years after employment ends under §432.3(c)(4).

The ‘reasonable request’ standard has limits. The law is not designed to allow someone who walks past your storefront to demand a full compensation breakdown for every role in your company. However, if a candidate is actively engaged in your hiring process — submitting an application, completing an interview, or advancing through onboarding — their request will almost certainly qualify as reasonable. Employers should have a consistent, documented process for responding to these inquiries, including who is responsible for providing the information and how it is delivered.

Pay scale disclosure obligations apply to all California employers under Labor Code §432.3. If you do not have a clear internal process for responding when an applicant asks what the job pays, build one now.

2. Employers with 15 or More Employees Must Include the Pay Scale in Every Job Posting

SB 1162 added Labor Code §432.3(c)(3), which requires employers with 15 or more employees to include the pay scale directly in all job postings — not behind a link or QR code. Under §432.3(c)(5), this obligation extends to third parties as well: if you engage a staffing agency, recruiting firm, or job board to post on your behalf, you must provide the pay scale to that third party, and the third party must include it in the posting. The requirement also covers any position that could be filled by a worker in California, including fully remote roles.

Labor Code §432.3 defines ‘pay scale’ as the salary or hourly wage range the employer reasonably expects to pay for the position. Bonus, equity, tips, and other forms of compensation are not expressly required, though many employers include them to attract candidates. The pay scale must appear in the posting itself — the Labor Commissioner has confirmed that linking to a separate page or providing a QR code does not satisfy the requirement.

If you post jobs through recruiters or third-party platforms, do not assume they are handling the pay scale requirement. Confirm it directly with every vendor posting on your behalf. Responsibility under §432.3(c)(5) runs to the employer.

3. Your Pay Range Must Reflect a Realistic, Good Faith Estimate — Not a Placeholder

The definition of ‘pay scale’ under Labor Code §432.3 was tightened effective January 1, 2026 by SB 642 — California’s Pay Equity Enforcement Act. The amended statute now requires that a pay scale reflect “a good faith estimate of the salary or hourly wage range that the employer reasonably expects to pay for the position upon hire.” This change was a direct response to employers posting artificially wide salary ranges that technically complied with the prior law but provided no meaningful information to applicants.

Employers with genuinely broad pay ranges for a role — due to geography, experience tiers, or variable compensation structures — should document the business rationale and bring the posted range as close as possible to actual expectations for the specific opening. A wide range may be defensible, but it must be explainable. If a candidate, a regulator, or opposing counsel challenges your posted range, you should be prepared to demonstrate that it was based on a real analysis of what you expected to pay upon hire — not a number chosen to satisfy the letter of the law without disclosing anything of substance.

If you cannot explain your posted pay range in plain business terms, narrow it. SB 642 made ‘good faith’ a statutory requirement, not just a best practice.

4. Social Media Recruiting Posts May Qualify as Job Postings — Treat Them Accordingly

As employers increasingly recruit through Instagram, Facebook, LinkedIn, and other platforms, a practical question has emerged: does a social media post constitute a ‘job posting’ for purposes of Labor Code §432.3(c)(3)? There is no definitive case law or agency guidance resolving this issue, but the risk is real and employers should not assume they are in the clear simply because they are posting on a social platform rather than a traditional job board.

Consider the range: a LinkedIn post advertising a specific open position with a link to apply is almost certainly a job posting. A casual Instagram story that says ‘we’re hiring — DM us for details’ and directs followers to an application page occupies grayer territory. But the underlying principle is the same: if the post is designed to attract applicants for a specific position, there is a credible argument that it qualifies as a job posting and must include — or link directly to — the required pay scale information. The fact that California’s pay transparency law was drafted in an era of traditional job ads does not immunize digital recruiting activity.

The safest approach is to include the pay scale in every recruiting post for a specific position, or to ensure any linked application page contains the required information. Inconsistency across platforms creates unnecessary exposure.

5. Save Your Job Postings — And Know the Other Hiring-Related Deadlines on Your Radar

One of the most overlooked obligations under SB 1162 is record retention. Labor Code §432.3(c)(4) requires employers to maintain records of job titles and wage rate history for each employee for the duration of employment plus three years after separation. Although the statute does not separately specify a retention period for the job postings themselves, given that wage and hour claims carry a three-year statute of limitations — and some related claims extend to four years — employers should retain copies of all job postings for at least three years. More importantly, build a formal process for saving and organizing those postings in a retrievable format.

Two additional obligations deserve attention. First, under Labor Code §432.3(a)–(b) (as originally enacted by AB 168, effective January 1, 2018), employers are prohibited from asking applicants about their salary history or relying on salary history in compensation decisions. Hiring managers must be trained on this rule — violations occur in conversations, not just on paper. Managers may, however, ask applicants about their salary expectations. Second, employers with 100 or more employees face a May 13, 2026 deadline to submit their annual pay data report to the California Civil Rights Department under Government Code §12999, as expanded by SB 1162. This report requires detailed workforce data broken down by race, ethnicity, sex, and job category. Start compiling that data now.

Record retention and pay data reporting are frequently treated as afterthoughts, but both carry real enforcement risk. Build them into your compliance calendar before the deadline is on top of you.

If you are a California employer, there is a major unresolved issue in PAGA litigation that could significantly impact your exposure—and your ability to enforce your arbitration agreements.

It is called a “headless” PAGA claim, and right now, California courts are split on whether these claims are even allowed.

The result: uncertainty, inconsistent outcomes, and a pending California Supreme Court decision that could reshape PAGA litigation as we know it.

Here are five things California employers need to know.

1. What Is a “Headless” PAGA Claim?

A traditional PAGA case has two components: an individual claim (violations the employee personally suffered) and a representative claim (brought on behalf of other aggrieved employees and the State of California). A “headless” PAGA claim removes the individual component entirely—leaving only the representative portion.

Why would a plaintiff do that? Strategy. If there is no individual claim, the plaintiff’s theory is that there is nothing left to send to arbitration—allowing the entire case to stay in court as a representative action, free from any arbitration agreement the employer has in place.

The practical effect is that plaintiffs may be using the pleadings themselves as a litigation tool to avoid arbitration altogether. Understanding what a headless claim is—and why plaintiffs pursue them—is the first step in developing a sound defense strategy.

2. The Courts Are Split—and the Split Is Real

California appellate courts have reached sharply different conclusions on whether headless PAGA claims are valid. Here is where things stand.

The employer-friendly view comes from the Second Appellate District in Los Angeles. In Leeper v. Shipt, Inc. (2024), the court held that every PAGA case necessarily includes an individual claim—whether the plaintiff pleads one or not. Under this reasoning, courts can compel arbitration of that individual component, and plaintiffs cannot avoid arbitration simply by omitting it from the complaint.

The plaintiff-friendly view is emerging elsewhere. The Fifth Appellate District (Central Valley), in CRST Expedited, Inc. v. Superior Court (2025), held that plaintiffs may proceed with purely representative claims even after dropping their individual claims. The Fourth Appellate District (San Diego/Orange County), in Rodriguez v. Packers Sanitation Services Ltd., LLC (2025), reached a similar conclusion—holding that courts should look only at the complaint as pled and will not read in an individual claim that was never alleged.

The same set of facts can produce completely different outcomes depending solely on where the case is filed. That kind of jurisdictional inconsistency is exactly why the California Supreme Court has stepped in.

3. Why This Split Matters Practically

This is not an abstract legal debate. The headless PAGA split directly affects whether employers can compel arbitration—which remains one of the most powerful tools in the PAGA defense toolkit.

Depending on the appellate district where a case is filed, employers may be able to compel arbitration of the individual claim and potentially limit representative exposure (Second District, under Leeper), or may find themselves stuck in court with a full representative action and no viable arbitration motion (Fourth and Fifth Districts, under Rodriguez and CRST).

In other words: same arbitration agreement, same underlying facts, dramatically different strategic posture—based solely on venue. For employers with operations across California, this means the geography of where a plaintiff files can be as consequential as the substance of their claims.

Employers cannot assume their arbitration agreements will function the same way in every California court. Right now, they may not.

4. The California Supreme Court Is About to Decide

The California Supreme Court has granted review in Leeper v. Shipt and is expected to resolve this split. Two core questions are before the Court: Does every PAGA action inherently include an individual claim, regardless of how the complaint is pled? And can a plaintiff bring a purely representative—or “headless”—PAGA action?

A decision is expected in 2026. This will be one of the most consequential PAGA rulings in years, with the potential to either eliminate the headless pleading strategy entirely or validate it as a permanent feature of PAGA litigation.

Employers should monitor this case closely. However a ruling comes out, it will immediately alter how PAGA cases are filed, litigated, and resolved throughout California.

5. What Employers Should Be Doing Right Now

While the Supreme Court works toward a decision, employers cannot simply wait. The uncertainty is active—cases are being filed right now—and strategy matters.

Venue awareness is essential. Where a case is filed may determine whether arbitration is even on the table, so employers and their counsel should monitor which district applies to any new filing and respond accordingly.

Arbitration agreements remain important but are not bulletproof. Maintaining well-drafted, up-to-date arbitration agreements is still critical—but their effectiveness in the PAGA context currently depends on which court is evaluating them. Do not assume your agreement will enable you to compel the plaintiff to arbitration, with a stay of the PAGA case.

Early case strategy is everything. Motions to compel arbitration, pleadings challenges, and forum-related arguments should all be evaluated at the outset of any new PAGA case. Decisions made in the early stages of litigation can significantly shape what comes next.

Expect plaintiffs to continue using this tactic. Headless pleadings are an intentional strategy, not an oversight. Until the Supreme Court rules, plaintiff-side practitioners will continue to file representative-only PAGA actions in favorable districts.

Watch the Supreme Court’s decision in Leeper v. Shipt carefully. The ruling will likely determine whether headless PAGA claims survive as a litigation tool—or disappear from California courts altogether.

The best thing employers can do right now is make sure they are working with experienced employment counsel who understand the current state of the law in each appellate district and can craft a defense strategy built for this moment of uncertainty.

For decades, the law firm business model operated on a familiar premise: a broad base of junior lawyers, a small group of partners at the top, and clients footing the bill for hours billed at every level of the pyramid. That model — the associate leverage model — is now under significant structural pressure, and the force disrupting it is artificial intelligence.

This is not a distant trend playing out inside BigLaw conference rooms in New York or Chicago. It is happening now, and it has direct implications for California employers who rely on outside counsel for employment defense, wage-and-hour compliance, PAGA exposure, and day-to-day HR guidance.

Understanding how the legal industry is changing — and knowing the right questions to ask — can help your company control costs, improve the quality of legal advice you receive, and build a more strategic relationship with your attorneys.

Here are five things every California employer should know about the post-pyramid legal landscape.

1. The Traditional Law Firm Pyramid Is Being Dismantled by AI

For most of the last century, law firms built their business model around leverage: partners supervised teams of junior associates who handled time-intensive, foundational work — document review, legal research, first-draft contracts, due diligence, and deposition preparation. Clients were billed for all of it, often at rates that bore little relationship to the actual complexity of the task.

This model has long defined both large law firms and insurance defense practices. In the insurance defense context — particularly for matters covered by employment practices liability insurance (EPLI) — firms agree to reduced rates in exchange for a steady volume of work from carriers. That economic structure creates pressure to push work down to lower-cost junior attorneys, often resulting in less experienced lawyers handling a significant portion of the matter.

Artificial intelligence is now disrupting that model. Many of the routine, process-driven tasks that once required junior attorneys can now be completed faster, more consistently, and at lower cost using AI tools. As a result, the economic justification for large teams of junior lawyers performing foundational work is rapidly eroding. In some cases, that structure is not just inefficient — it is increasingly misaligned with how the work is actually performed and what clients now expect.

At the same time, clients are increasingly expecting experienced attorneys to be directly engaged — providing strategic guidance, risk assessment, and practical decision-making rather than supervising layers of junior work.

Firms that adopt these tools can no longer justify — either economically or to their clients — maintaining large benches of junior lawyers performing routine tasks.

The takeaway: The traditional model that charged you for layers of junior work is giving way to a leaner structure. Whether that shift benefits your company depends on how well you understand it — and how proactively you engage your outside counsel.

2. AI Efficiency Is Changing What You Are Paying For

There is a common assumption that AI adoption in law firms will automatically translate into lower legal fees. That is not necessarily how this plays out — and employers who expect it to may be measuring the wrong thing.

The more important shift is not that legal work becomes cheaper. It is that high-quality legal judgment can now be delivered faster, with greater precision and consistency.

Clients are not ultimately paying for time. They are paying for answers — and for confidence that those answers are correct.

Consider a simple example.

You are locked out of your apartment at 10:00 p.m.

One locksmith arrives prepared, understands the likely issues, has the right tools, and gets you back inside in 15 minutes.

Another locksmith arrives without a clear plan, lacks the necessary tools, and takes six hours to solve the same problem.

Most people would pay a premium for the first — not because more time was spent, but because the problem was solved quickly, competently, and with certainty.

Legal services are moving in that direction. The value is no longer in the process — it is in the speed and reliability of the outcome.

AI allows experienced attorneys to diagnose issues faster, evaluate exposure more precisely, and deliver answers with greater confidence. When deployed properly, it shifts attorney time away from supervising junior work and toward strategy, risk assessment, and practical decision-making.

That is a meaningful upgrade in the quality of representation — even if the invoice does not decrease. If anything, this dynamic may place upward pressure on rates for experienced attorneys whose judgment can now be delivered more quickly and with greater confidence.

The risk for employers is when firms adopt AI tools but do not change how matters are staffed or billed — effectively layering junior time on top of AI-assisted work. In that scenario, the firm captures the efficiency gains created by AI while the client continues to pay for a staffing model that no longer reflects how the work is actually being performed.

The takeaway: Do not evaluate AI adoption solely by looking for lower bills. Ask whether the work being done reflects the level of judgment you are paying for. The right question is not “Did AI save me money?” but “Am I getting faster, more reliable answers from experienced counsel?”

3. Alternative Fee Arrangements Are Now a Reasonable Ask — Not a Radical One

One of the most important downstream effects of AI adoption is the growing viability of alternative fee arrangements (AFAs). Fixed fees, capped fees, blended rates, and subscription-style retainers are becoming more common as firms gain confidence in how long AI-assisted work actually takes.

For California employers, this matters. Much of employment law work — handbook reviews, PAGA audits, wage-and-hour compliance assessments, CRD responses — involves a defined and repeatable scope. An experienced firm using AI tools can often price that work more predictably than in the past.

Asking for a flat fee is no longer unusual. It is increasingly expected at firms that have adapted to the new economics.

This is particularly relevant in the PAGA context, where audits, “reasonable steps” documentation, and compliance reviews can be clearly scoped in advance. Open-ended hourly billing should not be the default where predictability is achievable.

The takeaway: For defined scopes of work, ask for fixed or capped fee structures. AI has made predictable pricing more achievable — and more appropriate — than it was even a few years ago.

4. The Right Outside Counsel Combines Judgment With Technology — Not Just Hours

As AI handles more routine work, the premium in legal services is shifting toward what it should have always been: judgment.

The attorneys who will deliver the most value are not those who can produce the longest research memos or the most exhaustive analyses. They are the ones who can apply strategic thinking to complex facts, anticipate exposure before it becomes litigation, and provide practical, business-oriented guidance.

For California employers, this changes how outside counsel should be evaluated.

A firm that has embraced AI should be more responsive, more efficient, and more focused on high-level analysis. If your counsel is still treating research and document review as premium billable work without any visible efficiency gains, that is a signal employers should take seriously.

The best employment defense firms now combine deep knowledge of California’s regulatory framework — including PAGA, the Labor Code, FEHA, and wage-and-hour law — with the tools that allow them to deploy that knowledge quickly and effectively.

The takeaway: Evaluate your counsel not just on legal knowledge, but on how they use technology to deliver results. Ask directly what tools they use and how those tools impact your matters. The answers will be highly revealing.

5. Smaller and Mid-Size Employers Now Have Access to Better Legal Support Than Ever Before

One of the most underappreciated effects of AI is that it is expanding access to high-quality legal support.

Historically, the cost structure of law firms — driven by the pyramid model — placed comprehensive compliance work out of reach for many smaller employers. A 50-person company often could not justify the cost of a full wage-and-hour audit, even when the underlying risk warranted it.

That is changing.

AI-enabled law firms and compliance platforms are making it possible for small and mid-size employers to access proactive, data-driven legal support at a more predictable cost. Tools that analyze time records, identify meal and rest break violations, and surface compliance risks before litigation arises are part of a broader shift toward technology-assisted risk management. This shift is already playing out in the market — including in platforms like Scaled Comp — with growing demand for tools that proactively analyze time and pay practices and surface risk before litigation arises.

For employers operating in California’s increasingly aggressive enforcement environment — including PAGA litigation, wage statement penalties, and evolving regulatory requirements — this shift comes at a critical time.

The employers who take advantage of it will be better positioned, better documented, and better defended than those who continue to rely solely on reactive, hourly-billed legal services.

The takeaway: If you have historically viewed comprehensive legal support as cost-prohibitive, reassess that assumption. The market is shifting in your favor.

Bottom Line for Employers

AI is not just changing how law firms operate internally — it is changing the value proposition of legal services and how employers should buy them.

The employers we work with most closely are already adjusting how they engage outside counsel — and seeing measurable improvements in both cost predictability and risk management.

California employers who understand this shift are in a position to get more value, make better decisions, and build more strategic legal partnerships. Those who do not will continue paying yesterday’s prices for work that no longer requires yesterday’s effort — or yesterday’s staffing model.

Action Checklist

  • Ask your outside counsel how AI tools are being used on your matters — and whether those efficiencies are reflected in how work is staffed and billed.
  • Request fixed-fee or capped arrangements for defined scopes of work, including PAGA audits, handbook reviews, and compliance assessments.
  • Evaluate counsel on responsiveness, judgment, and practical guidance — not just technical legal knowledge.
  • If you are a smaller employer, explore AI-assisted compliance tools and platforms that can reduce reliance on reactive legal spend.
  • Treat your legal relationship as a business relationship — ask direct questions, negotiate thoughtfully, and expect efficiency.

Most California employers took care of the February 1, 2026 distribution deadline under SB 294 — the Workplace Know Your Rights Act. But many have not yet addressed the law’s second compliance obligation, which arrives on March 30, 2026. That deadline is now two weeks away.

By March 30, every California employer must give current employees the opportunity to designate an emergency contact — and specify whether that person should be notified if the employee is arrested or detained. This is not a trivial administrative task. It requires updated forms, trained HR staff, new internal notification protocols, and clear documentation.

Here are five things California employers need to do before March 30.

1. Understand Exactly What the Emergency Contact Requirement Demands

SB 294 adds a distinct obligation on top of the February 1 notice requirement (which we previously wrote about here). By March 30, 2026, employers must provide all current employees with the opportunity to:

  • Designate (or update) an emergency contact; and
  • Indicate whether that contact should be notified if the employee is arrested or detained.

Going forward, for new hires, this information must be collected at the time of hire as part of the onboarding process.

Crucially, the notification obligation is not hypothetical. If an employee has opted in and is then arrested or detained at the worksite, the employer must contact their designated person. The same applies if the arrest or detention occurs off-site during work hours — provided the employer has actual knowledge of it.

This is a live operational requirement, not just a form to file. Employers need systems in place to actually execute the notification if and when a triggering event occurs.

2. Update Your Forms and Onboarding Documents Now

The March 30 deadline requires a discrete, documented outreach to every current California employee. The standard “emergency contact” field that may already exist in your new hire paperwork is not sufficient on its own. SB 294 requires a specific opt-in: employees must separately indicate whether they want the designated contact notified in the event of an arrest or detention.

Your updated form or acknowledgment should capture:

  • The designated contact’s name, relationship, and contact information;
  • A clear opt-in or opt-out indicating whether notification is authorized; and
  • A dated acknowledgment of the employee’s response.

For new hires going forward, this form should be integrated into your standard new hire packet alongside existing notices, I-9s, and arbitration agreements. Employers who already use centralized onboarding checklists will have an easier time embedding this requirement — but all employers should confirm that their documents are updated before March 30.

Also note: the law requires that employees be given the opportunity to update this information over the course of their employment. Build that flexibility into your process.

3. Train HR and Managers on the Notification Protocol

Collecting the emergency contact information is only half the obligation. The harder part for most employers will be ensuring that the notification actually happens when it needs to.

Employers should designate a clear internal owner for this process and train the following on what to do in a triggering event:

  • HR personnel who may be the first point of contact when law enforcement arrives at the workplace;
  • Security staff and front-office managers who are on-site and may witness an arrest; and
  • Supervisors who may be managing an off-site employee when a detention occurs during work hours.

The training should cover: (1) where emergency contact designations are stored and how to access them quickly; (2) the constitutional rights of employees during law enforcement interactions, as outlined in the SB 294 notice; and (3) the employer’s anti-retaliation obligations — an arrest at the worksite does not by itself constitute grounds for termination.

Remember that the Labor Commissioner’s Office will release educational videos by July 1, 2026 covering both employee rights and employer obligations under SB 294. Incorporating those into your compliance training once available will help demonstrate good-faith compliance.

4. Build a Recordkeeping System That Covers Both SB 294 Obligations

SB 294 carries documentation requirements for both the February 1 notice and the March 30 emergency contact collection. Employers must retain proof of compliance for at least three years. That means your recordkeeping system needs to capture:

  • Evidence that the Know Your Rights notice was delivered to each employee by February 1;
  • The completed emergency contact form for each employee (or a documented record that the employee was given the opportunity to designate a contact and declined); and
  • For new hires going forward, records showing when and how these items were provided at onboarding.

This is an area where many employers remain exposed simply because their employee records systems are fragmented. Onboarding documents live in one place, time and payroll records in another, compliance notices somewhere else.

5. Know the Penalty Exposure — It Is Layered and Significant

Noncompliance with SB 294 is not a minor administrative oversight. The civil penalties are substantial — and they stack.

  • Failure to provide the Know Your Rights notice: up to $500 per employee per violation;
  • Failure to collect emergency contact designations or notify a designated contact when required: up to $500 per employee per day, with a maximum of $10,000 per employee.

These penalties are enforced by the Labor Commissioner and can be imposed by a public prosecutor.

Bottom Line for Employers

The March 30, 2026, deadline is a firm statutory date with real penalties attached. Employers who handled the February 1 Know Your Rights notice distribution are partway there. But the emergency contact obligation is a separate requirement with its own forms, training demands, and notification procedures.

Before March 30, employers should:

  • Distribute updated emergency contact designation forms to all current California employees;
  • Integrate the form into new hire onboarding packets going forward;
  • Train HR and managers on how to handle a triggering notification event;
  • Ensure emergency contact records are stored in a centralized, accessible location; and
  • Document everything — your three-year retention obligation starts now.

California continues to expand employer obligations around workforce transparency and documentation. Employers who act now will be in the strongest position when the Labor Commissioner begins enforcement.

Want to go deeper on California’s 2026 compliance requirements? Join our upcoming Masterclass for a comprehensive review of onboarding documentation strategies and other hiring issues on Tuesday, March 24 at 10:00 AM, register here.

California is technically an at-will employment state. But practically speaking, that designation comes with so many asterisks that employers who treat at-will as a blank check to terminate anyone at any time are setting themselves up for costly litigation.

Here are five things every California employer needs to understand about the at-will doctrine:

1. At-Will Is the Starting Presumption — Not a Guarantee

California Labor Code section 2922 presumes that employment with no specified term “may be terminated at the will of either party on notice to the other.” That is the legal baseline. But it is just a starting point. The moment an employer creates an express or implied contract — through an offer letter, a handbook provision, or even verbal assurances from a manager — the at-will relationship can be modified or eliminated entirely. Employers need to actively preserve at-will status rather than assume it exists by default.

2. Employment Contracts Change the Rules Entirely

If you enter into a written employment contract for a specified term, at-will termination no longer applies in the traditional sense. Under Labor Code sections 2924 and 2925, a contract employee can only be terminated mid-term for a willful breach of duties, habitual neglect, or continued incapacity to perform. Similarly, the employee may only walk away for a willful or permanent breach by the employer. This is a very different standard than the at-will baseline — and employers who use employment contracts without understanding this distinction can find themselves facing breach of contract claims when they attempt to terminate someone they assumed was at-will.

3. Protected Categories and Activities Narrow At-Will Significantly

Even where at-will status exists, employers can terminate for any reason — or no reason at all. That is actually the point of at-will employment. What employers cannot do is terminate for an unlawful reason. California law prohibits adverse employment actions based on a lengthy and expanding list of protected categories — race, age, disability, gender identity, sexual orientation, military status, and more — as well as a growing list of protected activities including whistleblowing, jury duty, wage discussions, and even off-duty cannabis use. The distinction matters: you do not need a reason to terminate an at-will employee, but if the reason you do have turns out to be an unlawful one, you are exposed.

4. The 90-Day Retaliation Trap Under SB 497

This is where many well-intentioned employers get blindsided. SB 497, commonly referred to during its passage as the Equal Pay and Anti-Retaliation Protection Act, was signed by Governor Newsom on October 8, 2023, and took effect January 1, 2024, amending Labor Code sections 98.6, 1102.5, and 1197.5. It creates a rebuttable presumption of retaliation any time an employer takes an adverse action against an employee within 90 days of that employee engaging in protected activity.

Those three code sections cover a wide swath of common workplace situations:

  • § 98.6 — protects employees who report wage and hour violations
  • § 1102.5 — the whistleblower statute, protecting employees who report reasonably believed legal violations to a government agency
  • § 1197.5 — protects employees who discuss wages, ask about a coworker’s pay, or invoke their rights under California’s Equal Pay Act

Here is the practical trap: before SB 497, employees had to prove three things — protected activity, an adverse action, and a causal connection between the two. Now, if the adverse action happens within 90 days, the causal connection is presumed. The burden immediately shifts to the employer to prove the action was for a legitimate, non-retaliatory reason. Fail to do that, and the employer faces civil penalties of up to $10,000 per employee per violation — paid directly to the employee, not the state.

The real-world scenario that catches employers off guard: a manager has been meaning to address a performance issue for weeks, the employee files a wage complaint, and the manager finally acts. Even if the discipline was completely justified, the timing alone now puts the employer on defense in a retaliation claim. Documentation of performance issues before any complaint arises is no longer just good HR practice — it is your legal defense.

5. You Must Actively and Consistently Communicate At-Will Status

At-will status is not something you establish once and forget. It needs to be reinforced at multiple touchpoints: the offer letter, the employee handbook, onboarding acknowledgments, and any time the handbook is updated. The at-will clause in your handbook should specify that it can only be modified in writing signed by the owner, CEO, or president — not any manager. Verbal assurances by managers that an employee’s job is “secure” or that they will “always have a place here” can create implied contract claims that undermine even the most carefully drafted written policies. Train your managers on this. Their words carry legal weight whether they realize it or not.

The bottom line: California at-will employment is real, but it is fragile and narrowing. Employers who invest in clear policies, consistent documentation, and proactive manager training are far better positioned when a termination is challenged — and far less likely to hand a plaintiff’s attorney an easy 90-day retaliation argument.

Want to go deeper on this before it costs you?

Hiring in California is far more complex than the at-will doctrine suggests — and the risks start before Day 1. On Tuesday, March 24 at 10:00 AM, we are hosting a live masterclass covering exactly these issues: the realities behind California’s at-will doctrine, implied contract traps employers routinely overlook, compliant background check and wage transparency practices, and onboarding documentation strategies that protect your organization from the moment an offer is made.

If any of today’s five issues resonated with you, this masterclass is the logical next step.

Register here.

This past week’s Zaller Law Group masterclass on AI in the Workplace walked California employers through what they need to know right now about AI in the workplace. The conversation covered everything from a federal court ruling on AI and attorney-client privilege to California’s new automated hiring regulations to practical tools employers can start using today.

Here is a recap of five key takeaways every California employer, CEO, business owner, HR professional, and in-house counsel should be thinking about on how AI will impact their business:

1. The AI Revolution Is Happening Right Now — And the Window to Adapt Is Closing

We opened the masterclass with a reference to an article by Matt Schumer, CEO of Otherside AI, that has gone viral in the AI community. Schumer has spent six years building in the AI space, and his message is blunt: the gap between what insiders know is coming and what the general public understands has gotten too wide to keep sugar coating.

His comparison that stuck with me is this: we’re in a moment similar to February 2020, right before COVID. Most people weren’t paying attention, and then three weeks later the entire world changed. The pace of AI development is staggering. In 2022, AI couldn’t do basic math. In 2023, it passed the bar exam. By 2024, it was writing software and explaining graduate-level science. In late 2025, some of the best engineers in the world said they were handing over most of their coding work to AI. And the CEO of Anthropic has publicly predicted AI will eliminate 50% of entry-level white-collar jobs within one to five years.

Even if you think those predictions are overblown, here’s what matters for employers right now: if AI stopped developing today, it has already changed the competitive landscape. Businesses that are leaning into it are operating more efficiently, making better decisions, and gaining advantages over those that aren’t. The window to get ahead of this curve is closing fast.

What to do: Sign up for paid AI subscriptions—Claude Pro, ChatGPT Plus, or the $100 Pro plans if your budget allows. The difference between free and paid models is dramatic. Stop treating AI like a search engine. Push it with real business tasks you don’t think it can handle, and you’ll be surprised by what comes back. And build the habit of staying current—this technology is changing week to week.

2. Your AI Conversations Are Not Confidential — A Federal Court Just Made That Clear

One of the most important legal developments we covered is U.S. v. Heppner, a federal case out of New York that is making its way around the legal community. A CEO charged with fraud was using Claude to research his own criminal case. The FBI seized his computer, and when prosecutors sought access to his AI chat history, his attorneys objected, arguing the conversations were protected by attorney-client privilege.

The court disagreed. Chatting with an AI platform about legal issues does not create a confidential attorney-client relationship, and the content is not privileged. Users should treat AI like any other research tool—no different from typing a legal question into Google or drafting notes in a Word document. If it’s not a communication with your actual attorney, it’s not privileged.

This has significant implications for employers. When your HR team is using ChatGPT to figure out how to handle a performance issue, those conversations could be obtained by an opposing party in discovery. It feels private when you’re chatting with AI, but it isn’t.

There is a narrow opening the court left: if an attorney directs a client to perform AI research as part of the attorney’s work product, there could be an argument for protection. But that’s untested and narrow. On the flip side, AI chat history could also help justify employment decisions. If an HR professional used AI to research how to coach an underperforming employee—focusing on business reasons and best practices—that could be evidence the employer was focused on legitimate, non-discriminatory reasons.

While some AI software provides “incognito” modes, this does not make the conversations private, and there still is likely a record of that chat.  AI providers may still retain data for 30 days or longer, even when incognito is enabled. Much like a Google search, that data is going to be out there somewhere.

What to do: Treat AI conversations like any other company document—assume they are discoverable. If you’re handling truly confidential information, use a private system like Microsoft Copilot tied to your organization’s secure environment, not a public-facing platform. And develop an AI usage policy that makes clear to employees what can and cannot go into public AI systems.

3. California’s AI Hiring Regulations Are Already Here — And More Are Likely Coming

California already has regulations on the books governing AI in hiring. In October 2025, the Civil Rights Council issued regulations explaining that employers are liable for discrimination arising from automated decision systems (ADS) used in the hiring process.

The core principle is straightforward: existing discrimination laws apply when you use AI in hiring. You cannot deflect liability by saying “the software did it.” If your AI screening tool filters out candidates based on a protected characteristic—race, gender, age, disability, national origin—you are responsible, not the vendor. The definition of ADS is broad and covers many different tools that employers can use in the hiring process, such as any software that prioritizes, ranks, or filters candidates.

And the Legislature is potentially adding new AI-employment related laws in 2026. SB 947 proposes additional requirements for automated decision systems. SB 951 would require employers who displace an employee because of technology adoption to provide at least 90 days’ advance notice. These bills are making their way through the California State Legislature right now.

There is also a federal issue. The Trump administration has signaled interest in preempting state-level AI regulation to prevent a patchwork of 50 different state frameworks, which the AI industry strongly opposes. Whether federal preemption actually happens remains to be seen, but California employers need to comply with what’s on the books today.

What to do: Audit your hiring process now. Identify every tool that touches candidate screening, ranking, or selection—including applicant tracking systems and resume-screening software. Build transparency clauses into your vendor contracts. And most importantly, maintain a human in the loop for all hiring decisions. Don’t abdicate decision-making to software.

4. Your Data Is Your Greatest Asset — Use It Before Opposing Counsel Does

California employers don’t have many advantages when it comes to employment litigation, but here’s one they often overlook: their own data. Your time records, payroll data, break logs, and scheduling records are not just administrative paperwork—they’re evidence that can either protect you or sink you in a PAGA case, class action, or wage and hour claim.

We walked the masterclass through Scaled Comp, a software tool we developed out of a real litigation pain point. For years, when a PAGA case or class action came in, our paralegals and support staff would spend weeks manually analyzing time records—often across scattered formats like PDFs, CSVs, and sometimes even paper records going back years. We’d take a sample and extrapolate. That’s how most firms still do it.

Scaled Comp can now review the time records and produce a comprehensive analysis in days rather than weeks. It reproduces time entries in easy-to-read format, flags shifts with potential meal and rest break issues, and provides business intelligence into employer’s wage and hour compliance.

But the bigger point for employers is this: after the 2024 PAGA reform, employers who can demonstrate they took “reasonable steps” to comply can cap penalties at 15% of the maximum. One of the most powerful ways to show “reasonable steps” is proactive time record auditing. If you’re running monthly or quarterly meal break audits, and a PAGA letter arrives, you’re not scrambling—you already know where you stand.

What to do: Know your data before opposing counsel forces you to. Run proactive compliance audits on your time records—at minimum quarterly. Understand where your meal and rest break compliance stands across every location and every manager. Store your data properly and think about how you’ll use it defensively. And if a PAGA letter arrives, get your data analyzed immediately rather than going to mediation without understanding your actual exposure.

5. AI Can Transform Your Employee Training and Compliance Programs — Starting Today

Employers can take their  meal and rest break policy and have AI repurpose it into formats employees can fully engage with. It can simplify legal language into plain English. It can create quizzes for training sessions. Tools like Google’s NotebookLM can convert written policies into podcast-style audio that employees can listen to on their own time.

Compliance isn’t just having a policy—it’s making sure employees actually understand it and can access it in a format that works for them. And from a litigation defense perspective, being able to show that you didn’t just have a policy but that you actively trained on it, reinforced it, and made it accessible in multiple formats is powerful evidence of “reasonable steps” under the PAGA reform.

What to do: Start with one policy—meal and rest breaks is a great place to begin. Record a five-minute best-practice demonstration and use AI to turn it into reusable training content. Build a library over time. And think about your employees as an internal audience that needs to be marketed to—because the more they understand your policies, the more defensible your organization becomes.

The Bottom Line

AI is not coming to the California workplace—it’s already here. Your employees are using it whether you have a policy or not. California regulators are already holding employers accountable for how AI is used in hiring. And the federal courts have made clear that your AI conversations are not confidential.

But this is not just a story about risk. Employers who lean into AI strategically—who use it to train employees, audit compliance, analyze their data, and strengthen their litigation posture—are going to be in a fundamentally stronger position than those who ignore it or try to ban it. The employers who engage with this technology now, with eyes open and proper guardrails in place, will have a significant competitive advantage.

On February 6, 2026, the California Labor and Workforce Development Agency (LWDA) published a Notice of Proposed Rulemaking to adopt the first-ever set of formal regulations governing PAGA’s administrative procedures. That sentence alone should get the attention of every California employer.

Since PAGA was enacted in 2004, and even after the landmark 2024 reforms, there have been no regulations clarifying how the law’s administrative processes actually work—from the initial notice requirements, to the cure procedures, to settlement oversight. The proposed regulations would change that in significant ways, adding 34 new sections to Title 8 of the California Code of Regulations. The written comment period closes on March 23, 2026, and these rules could reshape how PAGA cases are initiated, defended, and resolved.

This Friday’s Five breaks down the five most important things employers need to know about these proposed regulations and what they mean for your business.

1. Under the Proposal PAGA Notices Must Include Specific Facts — Boilerplate Won’t Cut It Anymore

For years, a common frustration for employers receiving PAGA notices has been the vague, cookie-cutter quality of the allegations. A notice might list a dozen Labor Code sections and recite the statutory language, but tell you almost nothing about what the employee actually experienced or why they believe a violation occurred. That made it nearly impossible for employers to evaluate the claims, respond meaningfully, or take corrective action.

The proposed regulations take direct aim at this problem. Under proposed Section 17420, all PAGA notices will need to be filed using a standardized form prescribed by the LWDA. More importantly, the notice must include a “short and plain statement of the facts and theories supporting each violation alleged and personally suffered by the claimant.” The regulations make clear that “[c]onclusory statements, generalized or vague allegations of violations without supporting facts particular to the claimant’s circumstances or working conditions, or statements summarizing or restating the law or legal requirements are not sufficient.”

That is a significant change in practice, even if courts have technically required specificity for years. Standardizing the form and explicitly spelling out what does not qualify gives employers a much stronger basis to challenge inadequate notices.

But the real teeth are in proposed Section 17420(f): no violation or theory of violation may be alleged in any PAGA lawsuit, or released in any settlement, unless it was included in a compliant PAGA notice or amended notice and the procedural requirements were satisfied. This is a powerful new defense tool. If the notice did not adequately allege it, a plaintiff cannot litigate it or settle it. Employers and their counsel should pay close attention to this provision, because it creates a direct link between the quality of the notice and the scope of any subsequent litigation.

2. The LWDA Is Going After PAGA Mill Firms with “High-Frequency Filer” and “Vexatious Filer” Designations

The LWDA is not being subtle about the problem it is trying to solve. In its Initial Statement of Reasons accompanying the proposed regulations, the agency laid out the data: during fiscal year 2024–2025, a total of 8,846 PAGA notices were filed. Five law firms alone accounted for 2,086 of those filings—nearly a quarter of all notices. Three firms filed more than one PAGA notice per day on average, with one firm filing 605 notices and a single attorney filing 597 in a single year.

The LWDA described these high-volume filers as typically using template notices that “repeat the same or similar allegations in a conclusory, boilerplate, or frivolous manner,” and stated that in many cases these attorneys “do not report filing PAGA lawsuits, thus demonstrating an apparent strategy of using PAGA notices as a bargaining chip in seeking quick individual settlements and attorneys’ fees recoveries without representing or seeking to protect the interests of the state or other aggrieved employees.”

In response, proposed Section 17415 creates a two-tier system. First, any attorney or law firm that files 200 or more PAGA notices in a 12-month period is designated a “high-frequency filer.” These filers must include a cover letter disclosing that status and a signed certification from the claimant confirming the claimant reviewed the notice, believes the allegations accurately describe violations they personally suffered, and the notice is not filed for an improper purpose like harassment.

Second, and more consequentially, the LWDA can designate an attorney or person as a “vexatious filer” after providing notice and an opportunity to be heard. A vexatious filer designation applies when someone has repeatedly filed PAGA notices that fail to meet legal requirements—including notices with inadequate facts and theories, frivolous allegations, or notices that appear intended to harass. Once designated, the attorney or firm is subject to a prefiling screening order, meaning their PAGA notices will not be accepted for filing until the LWDA reviews them for compliance. The LWDA will maintain a public list of both high-frequency and vexatious filers.

For employers, this is a welcome development. While it will not eliminate PAGA litigation, it signals a meaningful effort by the LWDA to curb the most abusive filing practices that have driven up costs for employers—particularly small businesses in the restaurant and hospitality industries that are frequent targets of these mass filings.

3. The Small Employer Cure Process Has Detailed Procedures — And a 33-Day Clock

The 2024 PAGA reforms created a new pre-litigation cure process for employers with fewer than 100 employees, allowing them to propose corrective measures to the LWDA before a lawsuit can be filed. The proposed regulations now provide the detailed procedural framework for how this will actually work in practice.

Under proposed Sections 17430 through 17439, the process works as follows. Once an employer receives a PAGA notice, it has 33 days to submit a confidential cure proposal to the LWDA. That proposal must identify the violations the employer proposes to cure and describe the specific actions it will take to correct them. The LWDA then has 14 days to review the proposal and decide whether to schedule a conference. If the proposal is facially sufficient or if a conference would help determine whether a cure is possible, the LWDA will schedule a cure conference—which may be conducted in person, by video, or by phone.

Before the conference, both parties must file pre-conference statements. The employer describes its proposed cure measures in detail, and the claimant states their position on whether those measures are sufficient. At the conference, an LWDA attorney works with both sides to determine what measures are necessary to cure the violations. If a cure plan is reached, the employer has up to 45 days to complete the corrective actions and must submit a sworn statement to the LWDA confirming completion.

There are several important details employers should note. Cure proposals are treated as confidential settlement communications under Evidence Code Section 1152, so they cannot be used as admissions of liability. However, an employer cannot use the cure process for the same Labor Code violation more than once within a 12-month period, regardless of worksite location. The employee cannot file a lawsuit while the cure process is pending. And if the LWDA determines the cure is complete but the claimant disagrees, the claimant can request a formal hearing before the Labor Commissioner’s Office—but must do so within just 10 days.

The takeaway for small employers is straightforward: the cure process offers a genuine opportunity to resolve PAGA claims before litigation, but only if you act quickly. The 33-day clock starts running the moment you receive a PAGA notice. Employers should have a plan in place now for how they will respond, including having counsel ready to evaluate whether the cure process is the right path for a given case.

4. PAGA Settlement Oversight Would Be Getting Much Stricter

One of the key goals of the 2024 PAGA reforms was to increase the LWDA’s oversight of PAGA litigation, particularly when it comes to settlements. The proposed regulations significantly expand what parties must do when settling a PAGA case.

Under proposed Section 17461, a proposed PAGA settlement submitted to the LWDA must now include far more than just the settlement agreement itself. Parties must submit the fully executed settlement agreement, all court filings supporting the settlement (including motions and declarations), and proof that they notified every other person with a pending PAGA action against the same employer. That notification must include a bold-text warning that the proposed settlement “may impact or foreclose your ability to pursue claims against the same defendant(s).”

The LWDA must be given at least 45 days to review any proposed settlement, and the parties are prohibited from voluntarily consenting to a court hearing that gives the LWDA less time than that. Other claimants with pending PAGA actions can submit comments for or against the settlement within 21 days. These provisions are designed to prevent the low-value, quick-turnaround settlements that some practitioners have used to resolve PAGA claims without meaningfully addressing the underlying violations.

Perhaps most significantly, proposed Section 17462 prohibits any pre-litigation settlement from releasing PAGA claims. Specifically, if an employee has filed a PAGA notice but has not yet filed a lawsuit, any private settlement between the employee and employer during that window cannot release the employer from PAGA claims belonging to the state or other employees. This directly targets the practice of plaintiff attorneys using PAGA notices as leverage to extract quick individual settlements without ever filing suit or protecting the interests of other workers.

For employers, this means the days of quietly resolving a PAGA notice with a check and a release before litigation may be over. Any resolution of PAGA claims will need to go through formal litigation and court-supervised settlement processes, with the LWDA looking over the parties’ shoulders.

5. Employers Would Have a Formal Response Process

Under proposed Section 17421, employers have a formal mechanism to respond to a PAGA notice within 33 days of receipt. The response is optional—the regulations make clear an employer “may, but is not required to, file a response.” But given everything else in these proposed regulations, employers should seriously consider using it.

An employer response can identify which violations the employer disputes and describe the factual and legal bases for those disputes, supported by evidence. The response need not address every violation alleged—it can be targeted to the claims the employer disputes most. This response is filed with the LWDA during the same 65-day window the agency uses to decide whether to investigate the case.

Think about what that means strategically. If a PAGA notice is deficient under the new specificity requirements—if it contains the kind of boilerplate, conclusory allegations the LWDA itself has criticized—an employer response is the employer’s first opportunity to put those deficiencies on the LWDA’s radar. A well-crafted response could influence the LWDA’s decision to investigate, shape the scope of any cure proceedings, or lay the groundwork for future litigation defenses.

This is especially important when paired with the new rule that violations can only be litigated or settled if they were adequately alleged in a compliant PAGA notice. An early, documented employer response identifying notice deficiencies could pay dividends down the road.

What Employers Should Do Now

These regulations are still in the proposal stage—the comment period runs through March 23, 2026, and the final rules could look different depending on what feedback the LWDA receives. But the direction is clear: the LWDA is moving to standardize procedures, raise the bar for PAGA notices, crack down on abusive filing practices, and increase settlement oversight.

Employers should take the following steps now:

  • Review the proposed regulations and consider submitting comments to the LWDA by March 23, 2026, particularly if you have experienced issues with boilerplate or frivolous PAGA notices.
  • Ensure your compliance infrastructure is in place. The cure process rewards employers who can act quickly. If you receive a PAGA notice, you need to be able to evaluate the claims, assess your compliance posture, and decide whether to pursue a cure proposal—all within 33 days. As we have written about before, employers need to be using technology to understand their time record data – it provides many benefits.
  • Talk to your employment counsel about a PAGA response strategy. With the new formal response mechanism and heightened notice specificity requirements, there are real opportunities to challenge deficient PAGA notices early in the process.
  • Conduct proactive compliance audits. The 2024 PAGA reforms allow employers who can demonstrate “all reasonable steps” to cap penalties at 15%. These proposed regulations add another layer: a structured cure process that only benefits employers prepared to use it. The best time to prepare is before a PAGA notice arrives, and we have been working with many of our clients to be able to prove these reasonable steps.