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.

Last August at the Prosper Forum at the Ritz-Carlton, Amelia Island, we recorded a live conversation on a simple premise: leadership isn’t a title. It’s a decision you make every day.

I moderated a panel with leaders who build teams, carry accountability, and operate in environments where execution matters:

John Tallichet, CEO of Specialty Restaurants
Reggie Stover, Chief People Officer of Henny Penny
Josh Halpern, CEO of Big Chicken / Craveworthy Brands
Luke Kircher, President of Prosper Company
Michael Beck, CEO of Inc Tank GTM

Here are the five most useful takeaways, in their words and in practical terms.

1. Leadership is responsibility, not authority.

A recurring theme was that leadership shows up the moment people rely on you, not when you get the title. Reggie tied it to early life and the burden of being responsible for others. Josh framed it as being “worthy of follow,” pointing out that everyone has had “bosses” who weren’t leaders. Luke made it clear leadership isn’t a finish line; it’s an ongoing expansion of capability and responsibility.

Practical takeaway: If you’re evaluating leaders, don’t ask “How senior are they?” Ask “Do people naturally look to them when it gets hard?” That’s the job.

2. The best leaders don’t decide in a vacuum—but they do decide.

Two points held together beautifully: Josh emphasized gathering input from the people “in the trenches,” and then owning the final call. Reggie reinforced a hard-earned lesson from military training: the most dangerous failure isn’t a wrong decision; it’s indecision. John echoed the importance of decision-making under pressure in high-volume operations.

Practical takeaway: Build a culture where (1) decisions are informed by the people closest to the work, and (2) someone is accountable for making the call. “Consensus” can’t become a hiding place.

3. Selecting future leaders is an ethos test: team-first, coachable, accountable.

Reggie looks for people who raise their hand, bring energy, ask questions, and show courage. Josh described his “secret sauce” as selecting for people who care about legacy, put the team above themselves, celebrate wins loudly, and take accountability without excuses. John highlighted the disqualifier: “heroes” who want it to be about them. He also stressed coachability—especially the ability to take feedback without making it personal.

Practical takeaway: Performance isn’t enough. Your leadership pipeline should screen for ethos: team orientation, accountability, and coachability under pressure.

4. Development happens through ownership, exposure, and real stretch.

The panel converged on a critical idea: you can’t train leaders only with coursework. You train them by giving them ownership and letting them stretch into ambiguity.

Josh shared a defining lesson from early in his career: when he asked his boss to choose between two agencies, the response was, “If I have to do for you, I don’t need you.” The point wasn’t cruelty; it was ownership. Reggie described the intentional HR track (onboarding → goal setting → performance reviews → talent assessment → succession planning → development plans, including tools like 9-box when done correctly). Luke added a key caution: growth requires self-reflection about timing and sacrifice. Some people can lead, but “not right now,” and forcing that path can create burnout and personal cost.

Practical takeaway: Promote with a plan. Then “stretch” with support. Ownership without coaching is abandonment; coaching without ownership is stagnation.

5. The real differentiator is communication and vulnerability.

Reggie called communication the most critical leadership skill—whether on the battlefield, the basketball court, or in the boardroom. Josh added the trait that too many leadership conversations skip: vulnerability. The willingness to say, “I am the problem,” not as self-flagellation, but as ownership—and therefore the ability to fix it with the team.

John’s closing story tied it together: a leader made an early major mistake after rejoining the company, learned from it (by listening to the local team), and became a top-three leader. The through-line: leaders need grace to recover, but they must learn, communicate, and adjust.

Practical takeaway: If you want durable leadership cultures, normalize two things: direct communication and productive vulnerability. That’s how teams execute consistently at scale.

Watch the full panel on YouTube

If you’re a founder, executive, HR leader, or operator responsible for people and performance, this conversation will give you practical perspective from leaders in the arena—on hiring, accountability, culture design, succession, and building teams that execute.

You can watch the full video on YouTube here (and if you’re sharing it internally, it’s an excellent “leadership bench” discussion starter for your next ops meeting).

Across the country, state legislatures are moving quickly to regulate artificial intelligence in the workplace. California’s proposed SB 947 – the Automated Decision Systems in the Workplace – introduced in the California Legislature on February 2, 2026, is one prominent example, but it is part of a broader trend: laws that seek to govern how employers may adopt, deploy, and rely on AI-driven tools when making employment-related decisions.

Other proposed AI-related legislation underscores how rapidly this movement is accelerating. For example, SB 951—the California Worker Technological Displacement Act—would require employers to provide at least 90 days’ advance notice before layoffs caused by “technological displacement.” In addition, the California Labor Federation has publicly stated that it will sponsor or support more than two dozen bills this year focused on the impact of artificial intelligence on workers in California.

While these bills are typically framed as worker-protection measures, they reflect a deeper and unresolved policy tension—whether AI in the workplace should be regulated piecemeal at the state level, or whether regulation must occur at the federal level to avoid a patchwork of rules that materially hinder innovation, adoption, and economic growth.

Using SB 947 as a case study, it becomes clear that many of these proposals proceed from the same assumptions and raise the same structural problems.

At a high level, bills like SB 947 seek to regulate employers’ use of “automated decision systems” (ADS)—a term defined so broadly that it can encompass AI-driven tools, analytics software, scoring systems, and other technology used to assist with employment decisions. The scope of regulated activity typically extends well beyond hiring and firing to include scheduling, compensation, performance evaluation, work assignments, and discipline.

Under SB 947, for example, employers would be prohibited from relying solely on an automated system for disciplinary or termination decisions and would be required to conduct a human “independent investigation” to corroborate any AI-generated output. Similar proposals impose restrictions on the types of data that may be used, prohibit “predictive behavior analysis,” and bar the use of systems that could infer protected characteristics.

These bills also commonly create new notice and disclosure obligations. If an AI-assisted tool is used in connection with discipline or termination, employers may be required to provide written post-use notices, identify vendors, explain human review processes, and produce data inputs, outputs, corroborating materials, and impact assessments upon request.

Enforcement mechanisms tend to be expansive. Using SB 947 again as an example, compliance would be enforced not only by labor agencies and public prosecutors, but also through private civil actions with attorneys’ fees and punitive damages available. The result is not simply technology regulation, but a new, litigation-driven compliance regime layered on top of already complex employment laws.

Layered onto this regulatory push is a more fundamental uncertainty: we still do not know what AI will do to jobs. Yet many of these bills proceed as if the answers are already settled.

Below are five reasons why state-level efforts to regulate employer adoption of AI—illustrated by SB 947—are misaligned with where the AI policy conversation is actually heading.

1. State-Level AI Regulation Ignores the Growing Federal Consensus on the Need for Uniform Standards

At the federal level, there is increasing bipartisan agreement on one point: a state-by-state approach to AI regulation is incompatible with innovation, compliance, and economic growth. Although Congress has not yet enacted comprehensive AI legislation, federal policymakers have repeatedly emphasized the need for a national framework, particularly for technologies deployed at scale.

AI systems do not respect state borders. Employers operating across multiple jurisdictions cannot realistically deploy one version of a scheduling, hiring, or performance tool for California, another for Colorado, another for Illinois, and another for New York. The compliance burden discourages adoption, especially for mid-sized employers without dedicated AI governance teams.

Bills like SB 947 move states in the opposite direction by layering unique definitions, procedural requirements, and disclosure obligations on top of existing employment law—contributing directly to the fragmentation federal policymakers are attempting to avoid.

2. A Patchwork of State Laws Does Not Protect Workers—It Discourages Responsible AI Adoption

One of the ironies of these proposals is that they may reduce fairness rather than enhance it. When employers are discouraged from using standardized, data-driven tools due to legal risk, decision-making does not disappear—it becomes more subjective.

AI tools, when designed and implemented responsibly, can help standardize employment decisions, improve documentation, flag compliance risks, and reduce arbitrary outcomes in a regulatory environment as complex as California’s. A framework that treats AI as presumptively suspect, while leaving human discretion largely unregulated, misunderstands where workplace risk actually arises.

Advocates for federal preemption are not arguing for deregulation. Nor are they suggesting that existing discrimination, wage and hour, or harassment laws should cease to apply. Rather, they are calling for uniform standards that encourage transparency and responsible adoption instead of regulatory avoidance.

3. These Bills Assume AI’s Impact on Jobs Is Known—It Is Not

State-level AI regulation efforts frequently assume that AI is primarily a job-elimination tool that must be constrained to protect workers. That assumption is premature.

While some routine and repetitive tasks will undoubtedly be automated, history shows that productivity-enhancing technologies often create new categories of work, increase demand in unexpected areas, and expand employment over time.

This dynamic is captured by Jevons’ Paradox: as efficiency improves and costs decrease, demand often increases rather than contracts. Applied to AI, tools that make management, scheduling, analysis, or compliance more efficient may expand operations and create new roles that did not previously exist.

We do not yet know which jobs will shrink, which will evolve, and which will expand. Laws that lock in assumptions too early risk distorting outcomes rather than protecting the workers who are actually impacted.

4. Overregulation Risks Driving AI Use Underground Rather Than Making It Transparent

Another unintended consequence of these proposals is that they incentivize informal or opaque AI use. If deploying AI tools triggers extensive notice obligations, disclosure rights, and litigation exposure, employers may still rely on AI—but in less visible and less documented ways.

That outcome is worse for workers. Transparency and accountability arise from clear, workable rules that encourage open use, not from regimes that make employers defensive. This is particularly problematic given that AI is already embedded in most modern software platforms—from email systems and document tools to scheduling, communications, and analytics.

A federal framework could establish baseline protections while allowing best practices to evolve. State-level mandates risk freezing rules before those practices are even developed.

5. States Risk Becoming Outliers as Federal AI Standards Are Likely to Emerge

Even if bills like SB 947 are enacted, they are unlikely to be the final word. Federal AI legislation—particularly legislation that expressly preempts conflicting state laws—remains a realistic possibility.

If and when federal standards emerge, employers may find themselves having invested heavily in state-specific compliance regimes that are later overridden or rendered obsolete. From a policy perspective, this is inefficient. From a business perspective, it is destabilizing and may influence decisions about where to invest and expand.

The Bottom Line

SB 947 is best understood as an example of a broader legislative trend: state efforts to regulate AI in the workplace before its impacts are fully understood. These proposals often assume harm before evidence, substitute procedural mandates for substantive outcomes, and overlook the growing federal consensus in favor of uniform standards.

AI will change work—there is no question about that. But how, how fast, and for whom remains an open question. A national framework focused on outcomes rather than fear is far more likely to protect workers and encourage responsible innovation than a growing patchwork of state experiments.

What Employers Should Be Doing Now

Regardless of how AI regulation ultimately develops, AI is already in the workplace—often before employers realize it. The real risk for California employers is not AI itself, but using it without clear policies, training, and legal guardrails.

To help employers navigate this evolving landscape, we are hosting a one-hour masterclass focused on the practical, real-world use of AI in the California workplace.

Masterclass: AI in the California Workplace — Practical Tools, Real Use Cases, and Legal Guardrails

We will cover how employers are actually using AI today—from hiring and scheduling to performance management and documentation—along with the key legal and compliance issues to understand, including wage-and-hour exposure, discrimination risk, privacy concerns, and PAGA implications. Attendees will leave with practical guidance on how to use AI responsibly and reduce risk.

Wednesday, February 25, 2026 | 10:00 a.m. PT – Register here.

As California employers enter 2026, employment law compliance is no longer just about having policies in place—it is about being able to prove that the company took documented, reasonable steps to comply with the Labor Code before problems arose. Despite the 2024 PAGA reforms, PAGA filings continued to rise through 2025, and courts are now scrutinizing whether employers can demonstrate proactive compliance efforts to cap penalties and reduce exposure.

A comprehensive employment law audit is one of the most effective ways to meet that standard. When done correctly, an audit helps ensure policies reflect current law, managers are trained on day-to-day compliance obligations, required records are properly maintained, and new statutory requirements—such as updated notice and wage thresholds—are implemented on time. Just as importantly, a well-documented audit creates the evidentiary record employers now need to defend PAGA claims and take advantage of penalty caps under the reformed statute.

Below are five key areas California employers should be reviewing in 2026, along with practical questions designed to identify gaps, prioritize corrective action, and strengthen compliance systems before enforcement or litigation occurs.

1. Hiring Practices

 2. Records

  • New for 2026: Beginning February 1, 2026, employers must distribute the official “California Workplace – Know Your Rights” notice to all current employees, using a delivery method that reasonably ensures receipt within one business day.
  • Are employee files maintained confidentially and for at least four years?
  • Are employee time records maintained for at least four years?
  • Are employee schedules maintained for at least four years?
  • Do the managers have set forms for the following:
    • Employee discipline and write-ups
    • Documenting employee tardiness
  • How is the employee documentation provided to Human Resources or the appropriate manager?
  • Who is involved in reviewing disability accommodation requests?
  • How are employee absences documented?

3. Ensuring PAGA Compliance Through Reasonable Efforts and Addressing Wage and Hour Practices

  • Does employer conduct routine PAGA audit to show reasonable efforts to comply with the Labor Code at cap penalties, including:
  • Conduct periodic payroll audits
  • Establish compliant policies and handbook policies
  • Train supervisors on Labor Code compliance
  • Take appropriate corrective action with supervisors who violate company policy

Read more about the reasonable steps employers should be taking in 2026 to cap PAGA penalties in our prior article here.

  • Does the company have its workweeks and paydays established?
  • Are paydays within the applicable time limits after the pay period as required under the law?
  • Are employees provided with compliant itemized wage statements?
  • Are employees provided with a writing setting out their accrued paid sick leave each pay period? Has the amount of accrued paid sick leave reported to employees been updated to comply with California’s increased requirements in 2024?
  • Are employees properly classified as exempt or nonexempt?
    • For exempt employees, review their duties and salary to ensure they meet the legal requirements to be an exempt employee.
  • Are any workers classified as independent contractors, and if so, could they be considered employees under AB 5?
  • Are nonexempt employees properly compensated for all overtime worked?
  • Is off-the-clock work prohibited?
    • Policy in place?
    • Are managers trained how to recognize off-the-clock work and what disciplinary actions to take if finding employees working off-the-clock?
  • Does the company’s time keeping system round employee’s time?
    • If so, is the rounding policy compliant with the law? Employers should note that meal breaks cannot be rounded pursuant to Donohue v. AMN Services, and whether California employers may use time rounding at all is currently being reviewed by the California Supreme Court. Employers are cautioned about using time rounding given these cases.
  • Are meal and rest period policies set out in handbook and employees routinely reminded of policies?
    • (See additional PAGA audit items above)
    • Does the company pay “premium pay” for missed meal and rest breaks? If so, how is this documented on the employee pay stub? Does the company have a clear definition of what is considered a missed break and document why the employee missed the break?
    • Do employees record meal breaks?
    • Are managers trained on how to administer breaks and what actions to take if employees miss meal or rest breaks?
    • Are employees provided attestations to document the reason if the employee missed, took a short, or a late meal break? (See Donohue v. AMN Services)
  • If employer provides vacation, is the policy properly documented, tracked, and is unused vacation paid out with the employee’s final paycheck?
  • Are all deductions from the employee’s paycheck legally permitted?
  • Are employees reimbursed for all business expenses, such as uniforms, work equipment, mileage for work, and for expenses incurred for working from home (such as internet, cell phones, etc.)?

 4. End of Employment Issues

  • Are employees leaving the company provided their final wages, including payment for all accrued and unused vacation time?
  • Are final paychecks provided to employees within the required deadlines?
  • Does the employer deduct any items from an employee’s final paycheck?
    • If so, are the deductions legally permitted? (Use caution, very few deductions are permitted under California law.)

5. Anti-harassment, discrimination and retaliation

  • Are supervisors provided with sexual harassment training every two years? (If employer has 5 or more employees, supervisors are legally required to have a two-hour harassment prevention training that complies with California law.)
  • Are there steps in place to provide nonsupervisory employees with 1-hour sexual harassment prevention training and once every 2 years thereafter? (Required for employers with 5 or more employees.)
  • Are supervisors and managers discussing the company’s open-door policy to employees at routine meetings with employees? Is this being documented?

What “Reasonable Steps” Really Mean in 2026: How California Employers Reduce PAGA and Employment Litigation Exposure

As California employers move through 2026, one thing is clear: employment litigation—and PAGA litigation in particular—is not slowing down.

Despite the highly publicized 2024 PAGA reforms, 2025 became the largest year yet for PAGA LWDA filings. That reality has reset expectations. The reform did not reduce enforcement—it changed how employers must defend these cases.

The new dividing line is no longer simply whether a violation occurred.
It is whether the employer can prove it took all reasonable steps to comply.

While no employer can completely prevent lawsuits, California employers can significantly reduce exposure by focusing on what they can control. The following five steps focus on what can actually work in 2026 for employers that want to reduce risk, cap penalties, and maintain leverage when disputes arise.

1. Prove “Reasonable Steps” Before a PAGA Notice Is Filed

The reformed PAGA statute gives employers something they never truly had before: meaningful penalty reduction tied directly to compliance efforts.

• Employers that can prove they took reasonable steps before receiving a PAGA notice may cap penalties at 15%.
• Employers that attempt to fix issues after receiving notice face substantially higher exposure.

In practice, “reasonable steps” now require more than intent or informal reviews. Employers must be able to demonstrate a repeatable, documented compliance system.

This includes:

  • Regular wage-and-hour audits addressing meal and rest break compliance, timekeeping practices, and pay calculations
  • Written policies and handbooks that reflect current California law
  • Supervisor training with attendance records and materials preserved
  • Documented corrective action when issues are identified
  • Follow-up audits confirming that fixes were implemented

By 2026, periodic audits by experienced California employment counsel are no longer a best practice—they are increasingly the baseline for employers seeking to limit PAGA penalties.

2. Document Termination Decisions Accurately and Consistently

Termination decisions remain one of the most common triggers for employment litigation. While California law does not require a termination letter in most cases, providing one that accurately states the reason for separation is often a prudent step.

What matters most is consistency.

Plaintiff’s attorneys routinely compare termination reasons against:

  • Performance reviews
  • Internal emails and messaging platforms
  • EDD filings
  • Deposition testimony

Employers should avoid “softening” termination reasons or mischaracterizing a discharge as a layoff when performance or misconduct is the true basis. When an employer later attempts to explain that the real reason was different, it can appear as though the company is changing its story—damaging credibility at the outset of litigation.

If a termination is for cause, the documentation should say so clearly and accurately with concrete examples.

Common examples include:

  • Documented performance deficiencies
  • Policy violations
  • Insubordination
  • Dishonesty or theft
  • Harassment or discrimination
  • Excessive absenteeism or tardiness
  • Misuse of company resources

Clear, contemporaneous documentation often becomes one of the most important exhibits in early settlement discussions.

3. Use Employment Counsel as a Preventive Compliance Partner

California employment law is highly technical and unforgiving. Employers that treat employment counsel as emergency responders rather than strategic partners often incur greater legal expense over time.

In 2026, sophisticated employers integrate employment counsel into ongoing operations, including:

  • Policy and handbook updates
  • High-risk discipline and termination decisions
  • Wage-and-hour audits
  • Supervisor training
  • PAGA preparedness planning

This approach allows employers to identify and address issues early—before they become expensive class or representative actions—and often reduces total legal spend by avoiding defensive litigation altogether.

4. Invest in Knowledgeable, Empowered HR Leadership

A capable HR professional does more than administer paperwork. In 2026, HR is a critical risk-management function.

Experienced HR professionals:

  • Provide employees with a clear reporting channel for concerns
  • Conduct timely, well-documented investigations
  • Track complaints, resolutions, and corrective actions
  • Serve as a first line of defense against escalating disputes

No organization is immune from employee complaints. The question is whether issues are addressed promptly and professionally—or allowed to fester into litigation.

5. Ensure Ownership-Level Engagement and Accessibility

The most effective step for reducing employment litigation still comes from the top.

In practice, the amount of litigation an organization faces is often inversely proportional to how engaged ownership or executive leadership is with employees. Employers with strong litigation records frequently share common traits: leadership is visible, accessible, and willing to hear concerns.

When employees believe issues will be taken seriously and addressed internally, most disputes never reach a lawyer’s desk. When employees feel ignored or dismissed, litigation often becomes the mechanism they use to be heard.

In 2026, leadership engagement is not just cultural—it is strategic.

Final Thought

California employment litigation has entered a new phase. The question is no longer whether employers can achieve perfect compliance—it is whether they can prove responsible, proactive, and systematic efforts to comply.

For employers willing to invest in preparation, documentation, and leadership engagement, the reformed PAGA statute provides meaningful tools to reduce penalties and control risk. For those who do not, exposure remains as high as ever.

Preparation—not reaction—is what separates employers who manage risk from those who absorb it.