There is a persistent myth in business that bigger is better—that the way to handle a harder problem is to throw more people at it. If a five-person team is good, a fifty-person team must be ten times better. Most executives who have actually run a growing company know this isn’t quite how it works. Somewhere along the way, adding people stops making the work faster or better and starts making it slower, more diluted, and—if you run a California workforce—more legally exposed.

That last part is the one employers underestimate. The way you structure and scale a team doesn’t just affect productivity; it quietly reshapes your wage-and-hour risk, because California liability is built on multiplication. A single misclassification or a sloppy meal-break practice isn’t one problem—it’s one problem times every employee it touches, across every pay period. Here are five lessons about organizational structure, and what each one means for the legal exposure sitting inside your headcount.

1. Price’s Law: Your Risk Scales Faster Than Your Productive Core

The physicist Derek de Solla Price observed something uncomfortable about how work gets distributed, and Jordan Peterson has since popularized it as “Price’s Law”: in any organization, roughly half the work is done by the square root of the number of people. In a company of 10, about 3 people carry half the load. In a company of 100, it’s only 10. In a company of 10,000, it’s about 100. As you grow, the productive core grows by a square root—far slower than the payroll.

Here is the part that matters for an employer. Productivity scales with the square root of your headcount, but liability scales linearly with the headcount itself. Every employee you add is another person who must be correctly classified as exempt or non-exempt, another set of timekeeping records, another meal and rest period to get right, another wage statement that has to comply with Labor Code section 226. Under PAGA and California’s class mechanisms, a single defective practice becomes a per-employee, per-pay-period penalty. So growth quietly widens the gap between the value your organization produces and the exposure it carries. The takeaway isn’t “don’t grow”—it’s that scale has a hidden legal tax, and it comes due precisely when you’ve added people faster than you’ve tightened your compliance systems.

2. Coordination Cost Is Where Compliance Drifts

Every person you add to a team doesn’t just add capacity—they add connections. Two people have one line of communication between them; five people have ten; ten people have forty-five. The relationships that have to be maintained grow roughly with the square of the team size, which is why a company that ran cleanly with one location can feel like herding cats with twelve.

Compliance lives in exactly the places that coordination cost erodes. When you had one manager, meal-break practices, off-the-clock rules, and overtime approvals lived in one head and were applied one way. Add ten managers across five locations and you now have ten people understanding meal and rest break rules and timing, how to handle a termination, and how to respond to a complaint. Practices drift, no one intends it, and the drift is invisible until a demand letter makes it visible all at once. Small, tightly-coordinated teams stay compliant partly because everyone can hold the same rules in the same room; large, loosely-coordinated ones develop a dozen slightly different versions of the same policy, and in California, “slightly different” is where the penalties live.

3. Founder Mode: Distance From the Details Is How Liability Builds

In his now-famous essay “Founder Mode,” Paul Graham described a realization Brian Chesky had while scaling Airbnb. Chesky had followed the standard advice—hire good people and give them room to do their jobs—and watched it damage the company. The conventional playbook, he found, was written for professional managers, not for the people who actually understand the work.

Graham draws the distinction as “manager mode” versus “founder mode.” In manager mode, leaders operate only through their direct reports and stay deliberately distant from the details, treating the organization like a set of black boxes. Information gets filtered and softened at every layer, until the person nominally in charge is making decisions based on a version of reality that has passed through a long game of telephone.

That distance is not just an efficiency problem for an employer—it is the exact mechanism by which serious wage-and-hour liability accumulates. Leadership assumes HR “has it handled.” HR assumes the timekeeping system is configured correctly. Location managers assume their rounding practice is fine because no one has said otherwise. No one at the top actually knows whether the company’s meal-break premiums are being paid until the exposure is already years deep and quantified in a plaintiff’s spreadsheet. Founder mode—the owner or executive who stays close enough to the details to ask “show me how we actually pay overtime” before there’s a lawsuit—is not micromanagement. In California employment compliance, it is one of the cheapest forms of insurance available.

4. Elite Selection Beats Mass Mobilization—Including in Your Choice of Counsel

Special forces are not just a smaller version of a regular army. They are selected for a demanding standard, trained deeply for a specific mission, and trusted to operate with initiative. You do not send a large conventional force to do the work of a small specialized one, and vice versa—the two are built for different problems.

Complicated, high-stakes work rewards depth over breadth: people who have seen the specific problem many times and developed genuine mastery of it, rather than generalists who touch it occasionally. This is worth keeping in mind not only when you build your own team, but when you choose who defends it. California employment law is its own dense, fast-moving specialty—PAGA amendments, evolving meal-and-rest doctrine, wage-statement technicalities, the arbitration landscape—and a firm that practices it every day will recognize the patterns that matter before they become expensive, in a way a generalist handling the occasional employment matter simply cannot. When you’re evaluating counsel for a bet-the-company wage-and-hour claim, depth in the specific domain is the variable that most reliably predicts the outcome.

5. Ownership That Can’t Be Diffused

There is a well-documented phenomenon in group psychology: as a group gets larger, each individual’s sense of personal responsibility shrinks. Psychologists call it social loafing or diffusion of responsibility—when everyone is responsible, no one is. It shows up inside your own company, where a compliance gap that is “everyone’s job” turns out to be no one’s, and it shows up in how legal matters get handled, where a file passed down a chain to whoever is available never gets the ownership a serious problem demands.

On a small, focused team, ownership is unavoidable—there is nowhere to hide and no one to defer to, and the work gets done with the care of someone whose name is on it. That principle is worth applying in both directions: assign clear, named ownership of your compliance function so it doesn’t dissolve into the org chart, and when you retain counsel, make sure a senior person actually owns your matter rather than supervising it from a distance. The through-line of everything above is the same—on complicated, high-stakes employment problems, a small team that stays close to the details and is personally accountable for the outcome consistently beats a large one that doesn’t.

The Bottom Line

The instinct to solve hard problems by scaling up is understandable, but for a California employer it carries a specific and underappreciated cost: liability multiplies with headcount even as productivity lags behind it, and it accumulates fastest in exactly the gaps that growth creates—inconsistent practices across managers, and leadership too distant from the details to see the exposure forming. Managing that risk is less about adding people and more about staying close, keeping practices consistent, and putting clear ownership on both your compliance function and the counsel who defends it. On the problems that can genuinely hurt your business, small, focused, and accountable wins.

If your company is facing a claim under California’s Private Attorneys General Act (PAGA), most cases end not with a trial but with a negotiated settlement. Understanding where the settlement dollars actually go—and what a judge will scrutinize before signing off—helps you evaluate any proposed deal with clear eyes. Here are five things every California business executive should understand about how a PAGA settlement is structured and approved.

1. Attorneys’ Fees Come Off the Top of the Fund

PAGA is a fee-shifting statute. Under Labor Code section 2699, a prevailing employee is entitled to recover reasonable attorneys’ fees and costs, and that reality drives how settlements are built. In practice, plaintiffs’ counsel typically request roughly one-third (about 33%) of the gross settlement amount as their fee, and it is paid from the total settlement fund before employees receive their individual shares. The court does not simply approve whatever the parties agree to. A judge must independently find the requested fee reasonable. For employers, the practical takeaway is that the fee award is a major component of your total exposure, and it is negotiable as part of the overall settlement value.

2. Cy Pres: You Can Often Choose Where Unclaimed Money Goes

Even after checks are mailed, some employees inevitably fail to cash them or can’t be located. The question of what happens to that leftover money is answered through a doctrine called cy pres. Rather than letting the funds revert to the employer—which courts and the LWDA generally disfavor—the unclaimed portion of the employee distribution can be directed to a designated nonprofit organization.

Here is where employers have meaningful input: the cy pres recipient is negotiated and written into the settlement agreement, so you can often propose a nonprofit your company supports or believes in. The choice isn’t unlimited—the recipient must be a qualifying nonprofit, and California courts frequently expect an organization that provides civil legal services to those in need or otherwise bears a reasonable connection (“nexus”) to wage-and-hour issues. The judge must ultimately approve the designation. But within those guardrails, naming a charity you favor is a legitimate and common part of the negotiation.

3. Administration Costs Are a Real, Separate Line Item

PAGA settlements are almost always handled by a third-party settlement administrator rather than by the employer’s HR department. The administrator calculates each employee’s individual share, mails notices and checks, manages tax withholding and reporting (a portion of penalties is treated as wages), fields employee questions, and tracks uncashed checks. These services cost money—commonly anywhere from several thousand dollars to $25,000 or more depending on the size of the workforce and complexity of the class. Like attorneys’ fees, administration costs are paid out of the gross settlement fund and must be disclosed to and approved by the court. When you evaluate a proposed settlement, be sure you understand this line item, because it reduces the amount reaching employees and is part of the total number your company is funding.

4. The Named Plaintiff Usually Receives an Enhancement Payment

The employee who steps forward to file the case—the named plaintiff or “PAGA representative”—typically receives an enhancement (also called a service award or incentive payment) on top of their ordinary individual share. This payment compensates them for the time they spent, the risks they took on, and their willingness to put their name on the lawsuit. Enhancement awards commonly fall in the range of $5,000 to $10,000, though the amount varies with the facts.

Employers should know that courts scrutinize these payments and will not rubber-stamp an excessive figure. A judge wants to be sure the named plaintiff isn’t being paid a premium to accept a deal that shortchanges the broader group of aggrieved employees. In some cases courts have reduced or questioned enhancement requests. From the employer’s side, this is simply another negotiated component of the settlement—and one the court independently reviews for reasonableness.

5. Court Approval Is Mandatory—and the State Gets a Say

Unlike an ordinary civil dispute, a PAGA claim cannot be settled privately with a handshake and a release. Because a PAGA action is brought on behalf of the state, the settlement must be approved by the court, and the parties must submit the proposed agreement to the Labor and Workforce Development Agency (LWDA) at the same time it is submitted to the judge. The LWDA has the right to review and object.

The judge evaluates whether the settlement is fair, reasonable, adequate, and consistent with the purposes of PAGA—namely, encouraging employers to correct violations and deterring future ones. A critical mechanical point: the recovered civil penalties are split with the state. For PAGA notices filed on or after June 19, 2024, 65% goes to the LWDA and 35% goes to the aggrieved employees. (For older cases filed before that date, the split is the prior 75% / 25%.) This allocation, along with the fees, costs, enhancement, and cy pres terms discussed above, is exactly what the court reviews before granting approval.

The Bottom Line

A PAGA settlement is far more structured than a typical business dispute: attorneys’ fees, administration costs, a plaintiff enhancement, and the state’s statutory share all come out of the fund, and a judge must independently bless the whole package. But employers are not passive bystanders in the process—from negotiating the fee and enhancement figures to choosing the charity that receives unclaimed funds, there are meaningful levers to pull. Understanding these five elements puts you in a stronger position to evaluate any settlement proposal that crosses your desk.

Ten years ago, I started writing a post every Fourth of July about the things I’m thankful for. I’ve published it every year since 2015, and I can’t quite believe this year marks a decade of the tradition — and that it lands on a milestone for the country, too: this Fourth is America’s 250th.

A quarter-millennium ago, 56 men signed their names to a document and risked everything on an idea. Writing this post every year has become one of my favorite ways to step back from all of the work deadlines and think about why any of this work is possible in the first place. This year, that feels especially worth doing. This remains one of my favorite holidays, and hopefully I’ll be able to keep publishing this post for many years to come.

Five things I’m thankful for this Fourth of July:

1. The great risk and sacrifice our Founding Fathers took to establish the country.

When I learned about the Founding Fathers in high school history class, I didn’t have any real perspective on the risks they took in establishing the country. Only now — with a business, a family, and something to lose — do I understand what it meant. By all means, they were the establishment, the elite of American society, and if anyone had an interest in preserving the status quo, it was them. Instead, they risked their lives (their own and their families’) and their fortunes on an idea, and those sacrifices built the foundation we all benefit from today.

2. The freedom to speak my mind and to practice (or not practice) any religion I choose.

It is a remarkable thing to be able to freely speak your mind and believe whatever you want — and just as remarkable to be free to practice, or not practice, any religion you choose. We live in a tolerant society, and it is even better when the government is not telling you how to live your life. It is worth remembering that across the sweep of history, this freedom is the exception, not the rule.

3. A country that still attracts creative, productive people.

Creative and productive people want to practice their trade where the government will largely leave them alone and protect the gains they earn from their hard work (see item #5 below). The U.S. provides that environment, and it is why so many people come here to build a business or practice their trade. Talented people go where they are left alone to build and allowed to keep what they earn — and it is worth recognizing how lucky we are that this is still one of those places.

4. The right to pursue any profession — and nearly unlimited free resources to learn it.

No one dictates what you must become after high school or college. Everyone is free to pursue their interest, and the market — not your pedigree — decides the value of the effort. With almost any information freely available on the Internet, anyone can learn almost any skill, and like no other time in human history, individuals have an almost free way to sell their services or products to the world. In your mid-40s and want to make a career change? Perfect — and you don’t even need to go back to school, because the information is all out there. Didn’t finish college and are 20 years old with a big idea? Perfect. Venture capitalists don’t care about your pedigree; they only care whether you work hard and don’t give up.

5. Our legal system.

Yes, it sounds trite. And no, I don’t think our legal system is perfect by any means — but it is the best yet built in the history of mankind, and it is the foundation under everything above. Because people can reasonably predict the outcomes of their actions — that property lawfully obtained can be kept, that a breached contract carries repercussions — it creates an environment that rewards hard work and attracts the best talent from around the world. That is a large part of why the U.S. has led in ideas and new businesses. But the fact that the system is established does not mean our work is done. Fairness, reasonableness, and freedom from corruption have to be defended, not assumed. Two hundred fifty years in, that’s still the assignment.

To everyone reading — I hope you get to set the work aside for a bit and spend the day with the people you love.

Happy 250th, and Happy Fourth of July.

It has become common now for employees to post their terminations on social media.  In a recent video, an employee, tipped off that her remote sales role was about to be cut, quietly hit record and pushed back on the two HR representatives delivering the news — neither of whom she had ever met. She posted the recording online, and it has been viewed by millions. It is worth watching these videos, not to judge the people in it — a termination is a hard, human moment, and there is no single right way to do it — but because it captures, in real time, where remote and recorded terminations create new risk for California employers.

Here are five takeaways for conducting a termination in 2026, when you should assume the conversation may end up on someone’s phone.

1. Assume the meeting is being recorded — and act accordingly.

A few years ago this was a fringe concern. Today, an employee who knows a termination is coming will often prepare a recording, and the technology in everyone’s pocket makes it effortless. California is a two-party (all-party) consent state: under Penal Code section 632, it is a crime to record a confidential communication without the consent of every participant, and a communication is “confidential” when a party has an objectively reasonable expectation it is not being overheard or recorded. A recording made without that consent is generally inadmissible in court under section 632(d) — but admissibility is cold comfort once the clip is on social media. The practical lesson is simple: conduct every termination as though it will be played back later. Be professional, be consistent, and never say anything in the room you would not want a jury, or the internet, to hear.

There is a wrinkle worth noting. If the employer consents to a recording, it is hard for that employer to later complain that the employee recorded the same conversation. That raises a question we now get regularly: should the employer record the termination? My own thinking has shifted. A few years ago I would have said no. But if the employee is likely to record it anyway, there is an argument for having your own complete, accurate record — much like the body-camera evolution in law enforcement, where officers came to see the camera as protection precisely because they were doing things correctly. Reasonable practitioners disagree on this; some attorneys prefer never to have a recording of a termination meeting in existence at all. If you go the recording route, get genuine consent from everyone on the call and make sure your people are trained to perform well on tape.

2. Lock the reason down before the meeting — and do not argue it in the room.

The single most damaging moment in the video was the answer to “Why am I getting let go?” The representatives did not have a crisp, documented reason ready and instead offered to “circle back” with data they almost certainly will never send. That is the worst of both worlds: it signals the reason was not thought through, and it makes a promise the company will not keep. California is an at-will state, so an employer generally need not have a reason at all — but the moment you give one, it must be accurate, documented, and consistent everywhere it appears, including on the Notice to Employee as to Change in Relationship. Do not label a performance termination a “layoff” to soften the blow, and do not say “performance” when you mean the whole department is being cut; an inconsistency between what you say and what you wrote becomes a credibility problem if the employee later claims the real reason was illegal. Once you have stated the reason, stick to it. This is the “Moneyball” approach to terminations — deliver it directly, do not over-explain, and do not get drawn into debating whether the employee really underperformed. A measured “We understand you may not agree, but the decision has been made and we are moving forward” closes the loop without opening an argument.

3. Run the pre-termination red-flag audit — and respect the 90-day window.

Before any termination is final, review the entire personnel file looking for recent protected activity: wage complaints, a return from protected leave, a safety report, a whistleblower disclosure. This is no longer just good hygiene. Under SB 497 (the Equal Pay and Anti-Retaliation Protection Act), effective January 1, 2024, California law now creates a rebuttable presumption of retaliation when an employer takes an adverse action — including discharge — within 90 days of an employee engaging in activity protected under Labor Code sections 98.6, 1102.5, or 1197.5. The presumption shifts the early burden to the employer, but it is rebuttable: the way you overcome it is with a legitimate, well-documented, non-retaliatory reason that predates the protected activity. So if a termination falls inside that window, slow down, document the business reason thoroughly, and consider getting a second set of eyes from counsel. It also helps to note who is making the call — when the same person who hired the employee is the one firing them, the same-actor inference can cut in the employer’s favor.

4. Think through who is in the room — and avoid singling people out.

Two strangers delivering a termination to an employee who has never met either of them added confusion and emotion to an already difficult moment, and left no one on the call who could speak credibly to the employee’s actual performance. Having two company representatives present is good practice — one to deliver, one to witness and take notes. But at least one of them should be someone who knows the employee, ideally the direct supervisor who can stand behind the stated reason. Relatedly, when a termination is really part of a broader reduction, doing them one employee at a time creates two problems: it makes each person feel personally singled out for “performance” when the real driver was a headcount decision, and it lets word spread so the next person is tipped off and arrives ready to record. Where a whole group or department is going, handle it as a coordinated group action. None of this means remote terminations are off-limits — nothing in California law requires an in-person discharge, and remote separations are a permanent part of the landscape — but the remoteness makes deliberate planning about who delivers the message more important, not less.

5. Do not let “remote” or “emotional” derail the final-pay and notice mechanics.

A remote or out-of-state employer still owes immediate final pay at termination under Labor Code section 201, and a late final check still triggers waiting-time penalties under section 203 of up to 30 days’ wages. Remote logistics introduce specific traps. To pay a final check by direct deposit you need a new, separate written authorization for the final wages — the one signed at hire will not carry the day, and if the deposit does not land until the next day you have arguably paid late. To mail the check, get written authorization that includes the mailing address; the payment is then deemed made on the date mailed. And the required separation documents still have to go out regardless of distance: the change-in-relationship notice, the EDD’s unemployment benefits pamphlet, the COBRA or Cal-COBRA notice, and the state DHCS (HIPP) notice. One more reminder that surfaces constantly: if you bring an employee in for a scheduled shift and terminate immediately, you can owe reporting-time pay even though little or no work was performed — let the employee work at least half the shift first, or build the reporting-time amount into the final check. For the full mechanics of final pay, required notices, and severance releases, see our prior post on conducting California terminations here.

The throughline of the video — and of every termination — is that respect and preparation are the best risk management you have. Treat the employee with dignity, have the reason and the paperwork ready before you walk in, and assume someone is watching. Happy employees rarely sue, and employees who feel heard rarely do either; even one who disagrees with the decision will often, with a little time, understand that it was handled fairly. Done that way, a termination stops being your most dangerous moment and becomes one of your better-defended ones.

Most California employers think about their time and attendance records in only one context: the day a plaintiff’s lawyer subpoenas them. By then, the records are working against you — every late meal punch, every missing premium, every off-the-clock minute becomes a line item in someone else’s damages model. But the same data that creates exposure when you ignore it becomes one of your strongest defensive and operational assets when you actually use it. The difference between the two is simply whether you are reading your records on an ongoing basis or seeing them for the first time in discovery.

Here are five ways California employers can put their time records to work proactively.

1. Your records are the proof that you took the “reasonable steps” that cap PAGA penalties.

The 2024 PAGA reforms gave employers a defense that did not exist before: an employer that has taken “all reasonable steps” to comply with the Labor Code before receiving a PAGA notice caps its civil penalties at 15% of the amount otherwise recoverable, and an employer that takes those steps within 60 days after the notice caps them at 30%. Against a default exposure of $100 per pay period, per aggrieved employee (and up to $200 for subsequent violations), that cap is the difference between a seven-figure case and a five- or six-figure one. The statute expressly lists conducting periodic payroll audits and acting on the results as a reasonable step — and a payroll audit is only as good as the records behind it. The same is true of premium payments. Under Donohue v. AMN Services, LLC (2021), time records showing missed, short, or late meal periods create a rebuttable presumption that a compliant meal period was not provided. You rebut that presumption by showing you paid the one-hour premium — and your records are what prove you paid it, and when. Records you actually work with are the evidentiary backbone of the entire reasonable-steps defense. (For more on recording and reporting these issues, see our recent update on electronic timekeeping and pay stub compliance.) This is the primary reason I co-founded Scaled Comp – a software platform to help lawyers and employers analyze time records in an efficient process to decrease liability.

2. Your records tell you which managers understand the rules — before one gap becomes a systemic problem.

Aggregate compliance numbers hide more than they reveal. When you look at the underlying records, a cluster of late meal breaks at one store, or a manager whose location never records a single break premium, usually is not a workforce-wide problem — it is a training problem with a single supervisor. Catching that pattern in a monthly review lets you correct it with coaching and documentation while it is still small. This matters for two reasons. First, training supervisors on Labor Code and Wage Order requirements and taking appropriate corrective action with supervisors who fail to follow the law are both expressly named reasonable steps under the reformed PAGA — so the very act of identifying and correcting the manager builds your defense. Second, an issue you catch and fix in March is a handful of premium payments; the same issue discovered in litigation two years later is a class period.

3. Attendance and tardiness patterns are early intelligence on performance and risk.

Your time records are a performance-management tool, not just a compliance record. Chronic tardiness, employees performing work before they clock in, and punches that drift outside scheduled shifts are all visible in the data — if someone is looking. Two patterns deserve particular attention. Off-the-clock work, where an employee is regularly in the building and working before the clock-in punch, must be paid and addressed promptly, because an employee cannot waive the right to be paid or the right to minimum wage. And identical punch times day after day are a red flag: real human start times vary by a few minutes, and records showing everyone clocking in at exactly 8:00:00 every day invite the argument that the time was not actually recorded as worked. When you spot these patterns, pay what is owed, document the issue, and apply consistent discipline. That record of paying employees and correcting problems as you learn of them is exactly what demonstrates a policy with teeth — and it supports legitimate, well-documented employment decisions if performance ultimately becomes a separation issue. (See our recent post on termination best practices to reduce liability.)

4. Location-level data isolates your real exposure and tells you where to look first.

Running wage-and-hour compliance across a portfolio of locations is a fundamentally different challenge than running one — your exposure compounds with every site you add, and you cannot be everywhere at once. Records that can be sliced by location and ranked by issue type let you see at a glance where your biggest exposure sits, instead of working through site-by-site reports one at a time. If three of your twenty locations account for most of your missed-break premiums, that is where your audit time, your retraining, and your management attention belong. The goal is to drive your violation rate down to the point — generally a couple of percent or less — where the reasonable-steps defense is genuinely available and your residual exposure is simply not large.

5. The same data forecasts and prevents tomorrow’s violations — at the scheduling stage.

Everything above reads the records after the work happens. The highest-value use turns them around to look forward. California’s overtime structure alone is a forecasting problem: daily overtime after 8 hours, double time after 12, weekly overtime after 40, and overtime (then double time) on the seventh consecutive day in a workweek. Layer on split-shift premiums and reporting-time pay, and a schedule that looks fine on paper can carry premium obligations no one priced in. Historical records show you which shift patterns trigger these costs, so you can flag them while the schedule is still a draft — before it is published, when changing it is free — rather than discovering the overtime on the back end. That is both a compliance control and a budgeting tool: you are managing labor cost and legal exposure in the same moment, rather than reconciling both after payroll has already run. (Split-shift premiums and reporting-time pay each carry enough nuance to deserve their own treatment, and I will take them up in a future column.)

The throughline is simple: records you look at only in litigation are a liability, and records you work with every month are an asset. The cost of building that habit is modest, and in 2026 the technology to automate most of this by using software like Scaled Comp is very accessible for most employers. The cost of not building it tends to show up all at once, years later, in a demand letter.

California employers know the rule by heart: non-competition agreements are void in this state. Business and Professions Code section 16600 has been on the books for over a century, and the Legislature doubled down in 2024 with SB 699 and AB 1076, making it unlawful even to attempt to enforce a non-compete and requiring employers to send notices to employees who had signed them. The conventional wisdom that follows is that when a competitor raids your workforce — or when your star branch manager walks out the door with your team and your customers — there is nothing you can do about it.

Readers of this blog know that the conventional wisdom is wrong. As I wrote last June in “Noncompetition Agreements Remain Unenforceable in California — But Employers Still Have Tools to Protect Company Assets”, the end of the non-compete did not leave California employers defenseless: the Labor Code’s duty of loyalty (sections 2860 and 2863), interference claims, and other statutory and common law remedies remain available to protect company assets. A new published Court of Appeal decision now shows just how much force those tools carry.

In Guild Mortgage Company LLC v. CrossCountry Mortgage LLC (4th Dist., Div. One, May 27, 2026, D085036/D085273), the court made clear that while California protects employee mobility after the employment ends, employees owe their employer an undivided duty of loyalty while they are still employed — and managers entrusted with running the business may owe full fiduciary duties on top of that. A competitor that helps employees breach those duties can be liable for aiding and abetting the breach. Here are five takeaways from the decision for this Friday’s Five.

1. The facts: a branch “gutted” from the inside

Guild and CrossCountry (CCM) are rival nationwide residential mortgage lenders. According to Guild’s complaint, over an 18-month period CCM induced and conspired with several of Guild’s branch employees — including the branch manager, a senior loan officer, and the branch operations manager — to gut the branch by recruiting their Guild colleagues to come work for CCM, diverting Guild’s customers to CCM, and converting Guild’s pipeline of active loan applications to CCM. Critically, all of this allegedly occurred while those employees were still employed, and being paid, by Guild. The conspirators also allegedly accessed Guild’s computer systems without authorization and copied confidential customer financial information, loan-level data, and employee compensation information.

The result was a mass resignation of virtually all of the dozens of employees at the branch. Guild first arbitrated against the three ringleaders and won — the arbitrator ordered the branch manager alone to pay over $10.6 million. Guild then sued CCM. The trial court sustained CCM’s demurrers and dismissed the entire case, concluding the employees owed Guild no actionable tort duty and that the remaining claims were displaced by California’s Uniform Trade Secrets Act (CUTSA). The Court of Appeal reversed across the board.

2. Every employee owes a duty of loyalty — not just executives

The centerpiece of the decision is its reaffirmation that “an employee, while employed, owes undivided loyalty to his employer.” The court grounded this in longstanding case law (Huong Que, Inc. v. Luu (2007); Fowler v. Varian Associates, Inc. (1987); Stokes v. Dole Nut Co. (1995)) and in Labor Code section 2863, which requires an employee who has business of his own similar to that entrusted to him by his employer to “always give the preference to the business of the employer.”

The court drew the line that matters for employers and employees alike: California law permits an employee to seek other employment and even to make some preparations to compete before resigning — but it “does not authorize an employee to transfer his loyalty to a competitor.” Recruiting your coworkers for a competitor, steering customers away, and moving the company’s active business pipeline to a rival while still drawing a paycheck crosses that line.

Significantly, the court declined to follow AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018), which some defendants have read to mean that an employee’s obligations to an employer sound only in contract, not tort. The Guild Mortgage court held that AMN never considered the contrary authority or Labor Code section 2863, and that disloyalty of this kind violates a social policy meriting tort remedies. This is a meaningful clarification: the duty of loyalty exists by operation of law, with tort remedies attached, whether or not the employee signed anything.

3. Fiduciary duty turns on function, not title

CCM argued that the branch manager could not owe fiduciary duties because he was “merely a branch manager,” not a corporate officer. The court rejected the argument, relying on GAB Business Services, Inc. v. Lindsey & Newsom Claim Services, Inc. (2000): an officer or manager who participates in the management of the company and exercises some discretionary authority is a fiduciary as a matter of law, while a purely “nominal” officer with no management authority is not. As GAB put it, the test “is not control; it is, instead, merely participation in management” — a low threshold.

The Guild Mortgage court distilled the principle into a sentence every employer should remember: what matters is not the title, “but rather the levels of trust, confidence, and discretion reposed by the employer.” Guild had entrusted its branch manager with stewardship of a sizable branch, supervision of dozens of employees, and safeguarding sensitive customer financial information. That was enough to plead a fiduciary relationship — and a competitor that knowingly assists a fiduciary’s betrayal can be liable for aiding and abetting the breach.

4. CUTSA does not swallow the case

The trial court had dismissed Guild’s interference claims and its claim under Penal Code section 502 (the Comprehensive Computer Data Access and Fraud Act, or CCDAFA) on the theory that CUTSA displaced them. The Court of Appeal disagreed on both fronts, and these holdings are important for any employer litigating employee-raiding cases.

First, on the interference claims, the court applied the “gravamen” test: courts look at the gist of the complaint to determine whether a claim is really just a repackaged trade secret claim. Here, the heart of Guild’s case was not the taking of confidential information — it was a coordinated scheme to sabotage a branch by appropriating its personnel, customers, and business pipeline while the key players were still on Guild’s payroll. The data theft was in aid of that scheme, not the scheme itself. Claims with that independent factual basis survive.

Second, in a holding of first impression in the published California case law, the court held that CUTSA does not displace civil claims under the CCDAFA at all. The two statutes target different social ills — CUTSA protects intellectual property; the CCDAFA protects the integrity of computer systems and data. The court found it implausible that the Legislature created (and later expanded) the section 502 civil remedy only to have it swallowed by CUTSA, enacted in the same month in 1984. For employers, this confirms that unauthorized access to company systems by departing employees supports a standalone statutory claim with its own remedies, regardless of whether the information taken qualifies as a trade secret.

5. Practical steps for employers — on both sides of the raid

For employers worried about being the target of a raid:

  • Ensure your employment agreements with managers and key employees include enforceable provisions — duties of confidentiality, agreements not to solicit or divert clients and employees during employment, and acknowledgments of the trust and discretion placed in managerial roles (the Guild employees had exactly these provisions, and they supported the interference-with-contract claim).
  • Maintain and enforce computer access policies, since unauthorized access and copying is what triggers CCDAFA liability.
  • Monitor for the warning signs — unusual data downloads, coordinated resignations, customers suddenly moving to a competitor — and act quickly, because Guild’s prompt arbitration against the individual employees produced a substantial award before the case against the competitor was even decided.

For employers doing the hiring: this decision is equally a warning. Recruiting from a competitor is lawful — California protects employee mobility, and nothing in Guild Mortgage changes that. But there is a difference between hiring a competitor’s employees after they resign and enlisting a competitor’s current employees to recruit their colleagues, divert customers, and move business while still on the competitor’s payroll. Aiding and abetting a breach of the duty of loyalty or fiduciary duty exposes the new employer to the full range of tort remedies, including potential punitive damages. Train your recruiters and managers on where that line sits, and document that candidates are not bringing data, customer lists, or active business with them.

The lesson of Guild Mortgage is that California’s hostility to non-competes was never a license for disloyalty. The non-compete ban governs what employees may do after they leave; the duty of loyalty governs what they may do before they leave. Employers should make sure their agreements, policies, and litigation strategies account for both.

Terminating an employee is one of the hardest things a business does, and it is almost certainly the most legally scrutinized decision you will make in the workplace. It is also one of the few decisions that triggers immediate legal obligations — the clock starts running the moment you end the relationship. Yet how to actually conduct a termination is not taught in any management class.

The good news is that a termination handled the right way is not just a risk to survive — it is an opportunity to reduce your liability. The same disgruntled employee who walks out feeling blindsided and shorted is the one who calls a plaintiff’s firm on the drive home. The employee who is treated with respect, paid everything owed on the spot, and given a clean process to point back to is a much harder case for that firm to build. Here are five things to get right.

1. Document the true reason for the termination — and do not sugarcoat it

    If the termination is for cause, say so and document it as for cause. Do not take the easy route and tell the employee they were “laid off” or that it was a “reorganization” when the real reason was poor performance, theft, or a policy violation. It feels kinder in the moment, and it avoids an awkward conversation, but it sets a trap for the company.

    Here is why. If that employee later sues — for discrimination, retaliation, or wrongful termination — and the company has to explain in litigation that the real reason was performance, you have handed the plaintiff a credibility problem. The story changed. A shifting explanation for a termination is exactly the kind of evidence a plaintiff’s lawyer uses to argue the stated reason was pretext for an unlawful one. Juries notice when the reason on the separation paperwork does not match the reason the company gives under oath.

    Document performance as you actually see it, contemporaneously, and make sure the reason you give the employee, the reason in the file, and the reason you would give a jury are all the same reason. Consistency is your friend here.

    2. Have the final paycheck — and everything else owed — ready before the meeting

    This is the issue that did not get enough attention a few years ago and now drives a meaningful share of termination claims. Under Labor Code section 201, when you terminate or lay off an employee, all final wages are due immediately, at the time of discharge — not on the next payday, not at the end of the week, not “once payroll runs.” (If an employee quits without notice, you have 72 hours; with at least 72 hours’ notice, it is due on the last day.)

    “Final wages” is broader than people assume. It includes regular and overtime wages, and all accrued, unused vacation or PTO, which California treats as earned wages that cannot be forfeited. It also includes earned commissions and non-discretionary bonuses to the extent they can be calculated.

    Miss the deadline and you are exposed to waiting time penalties under Labor Code section 203: the employee’s full daily wage rate for every day the final pay is late, up to 30 days. For a single mid-level employee that can run into thousands of dollars on its own — and these penalties are a favorite add-on claim because they are easy to prove and separate from the underlying wages. The one escape valve is a genuine good-faith dispute about whether the wages were actually owed; a payroll-processing delay or “we needed a few more days” is not a defense.

    A practical, easily missed trap that ties into scheduling: if you bring an employee in for a scheduled shift and then terminate them early in that shift, you may owe reporting time pay on top of everything else — generally half the scheduled shift (no less than two and no more than four hours) at the regular rate. If you are going to terminate someone who is scheduled to work, either handle it before the shift or let them work at least half of it. Better yet, build the final-pay calculation before the employee ever walks into the room. Planned terminations should never produce a late or short final check.

    3. Conduct the termination meeting with respect

    There is nothing scientific about this one, but after years of defending these cases I am a firm believer in good bedside manner. Most employees will not enjoy being terminated, but they will usually understand the decision if they were given honest performance feedback along the way and were treated like an adult during the meeting itself.

    The employees who sue are very often not the ones with the strongest legal claim — they are the ones who felt humiliated, ambushed, or disrespected on the way out. Keep the meeting brief, factual, and private. Have a second management witness present. Do not argue, debate, or pile on; the decision is made, and the meeting is to deliver it, not to relitigate it. Tell them what comes next — final pay, benefits continuation, return of property — so they leave with information rather than a grievance.

    Dignity is cheap, and it is one of the most cost-effective forms of litigation prevention available to an employer.

    4. If you offer severance, get the release right under current California law

    Paying severance can cost money in the short term, but in exchange for that payment you should obtain a release of claims — and a properly drafted release can save enormous time and money down the road. The catch is that the rules for what a California severance agreement can and cannot say have changed significantly, and an agreement built off an old template may be unenforceable or expose you to new claims.

    A few of the current requirements and limits to keep in mind:

    • SB 331 (the “Silenced No More Act”). For agreements signed on or after January 1, 2022, you must give the employee at least five business days to consider the severance agreement (they may sign sooner if they choose), and you must advise them in writing of their right to consult an attorney. The agreement cannot prevent the employee from disclosing factual information about unlawful acts in the workplace such as harassment, discrimination, or retaliation, and any non-disparagement provision tied to a FEHA release must include specific carve-out language preserving the employee’s right to discuss unlawful conduct. You can still keep the severance amount confidential and protect genuine trade secrets.
    • No “no-rehire” clauses. Under AB 749, settlement and severance agreements may not contain provisions barring the employee from future employment with the company or its affiliates.
    • Non-competes are void — and you may owe notice. California’s prohibition on non-competes was strengthened by SB 699 and AB 1076 (effective January 1, 2024), which also created a private right of action and required employers to send individualized written notice to current and certain former employees that any non-compete provisions are void. Do not paper a severance agreement with restrictive covenants that California will not enforce; doing so can itself be treated as unfair competition.
    • Older workers (age 40+). If you want a valid release of age claims under the federal ADEA/OWBPA, you still need the separate consideration period (generally 21 days, or 45 days in a group layoff) and a 7-day revocation window. These run alongside, not instead of, the SB 331 timeline.

    The takeaway: a release is still one of the best tools you have, but only if it is current. Have counsel review your template — not every few years, but on the cadence California’s legislature actually moves, which is essentially every year.

    5. Keep the right records — and work from a checklist

    Most of what protects you in litigation is built before the lawsuit ever arrives, in the form of records you can actually put your hands on. Retention guidelines worth following:

    • Payroll and time records: keep at least four years on a rolling basis. The Labor Code requires shorter periods, but wage claims (including unfair competition claims under the UCL) can reach back four years, so four years is the practical floor.
    • Personnel files: at least three years after termination, and longer is advisable given the longer statutes of limitations on many employment claims.
    • Paid sick leave records: at least the statutory period, and keep in mind accrued, unused sick time may need to be reinstated if you rehire within a year.
    • If litigation is anticipated: preserve everything and suspend routine destruction until the matter resolves.

    Then build a checklist and use it every single time. Termination is exactly the kind of high-pressure, emotionally charged event where it is easy to forget a step, and a checklist forces you to think the process through when there is no pressure — final pay calculated, accrued vacation included, benefits/COBRA information ready, property return arranged, access and credentials disabled, separation documents prepared and compliant, and the reason documented consistently. A checklist also lets you confirm your managers are following both the legal requirements and your own internal process.

    One additional 2026 note if you are doing anything larger than a one-off termination: the California WARN Act now requires expanded content in mass-layoff, relocation, and termination notices issued on or after January 1, 2026 (SB 617) — including information about workforce development board coordination and the CalFresh food assistance program. If you are contemplating a reduction in force, loop in counsel early; the 60-day notice obligation and the new notice content are easy to get wrong and costly when you do.

    A termination will never be pleasant. But the difference between a termination that becomes a six-figure problem and one that quietly closes the file usually comes down to the things in this list: an honest, consistent reason; a final check that is correct and on time; a respectful conversation; a release that complies with current law; and records you can actually find. Do those five things and you have turned one of your riskiest decisions into one of your better-defended ones.

    Join Our Upcoming Masterclass

    Terminating California Employees — Exiting with Confidence: Best Practices for Lawful Terminations and Litigation Prevention

    Tuesday, June 17, 2026, 10:00 AM PT

    A termination is one of the highest-risk decisions a California employer makes — and often the first thing a plaintiff’s attorney scrutinizes when a claim comes in. Performance issues, misconduct, protected leave, final pay deadlines, and severance terms all have to be weighed before the decision is final, and a misstep on any one of them can turn a routine separation into a wrongful termination, discrimination, or retaliation claim.

    Join Anthony Zaller and Anne McWilliams for a practical Masterclass designed to help California employers make sound, defensible termination decisions while minimizing litigation exposure. Attendees will leave with actionable guidance on documentation, pre-termination risk assessments, separation and final pay requirements, and severance and release agreements.

    In this session, you will learn how to:

    • Identify the legal risks that should be assessed before a termination decision is final
    • Build documentation that supports and defends the decision
    • Conduct a termination meeting that reduces conflict and exposure
    • Use severance and release agreements effectively
    • Meet California’s final pay and separation requirements
    • Reduce the risk of wrongful termination, discrimination, and retaliation claims

    Register here.

    California employers have extensive obligations under the Labor Code to create and maintain accurate time records and pay stubs. The Labor Code itself doesn’t prescribe a specific format or technology, but the way employers handle these records has only grown more important — particularly after the 2024 Private Attorneys General Act (PAGA) reform, which ties penalty caps to whether an employer can show “reasonable steps” toward compliance. Solid, accessible records are now one of the strongest pieces of evidence employers can put in front of a court or the Labor Commissioner.

    This Friday’s Five covers five issues every California employer should think through when it comes to electronic timekeeping and pay stubs.

    1. Is there a required type of timekeeping system?

    No. California law does not mandate any particular timekeeping system, and pen-and-paper records remain legally permissible. The key requirement is that records be kept in “ink or other indelible form” — meaning entries cannot be erased, altered, or made to disappear.

    That said, most employers — even those with only a handful of employees — have moved to electronic systems for good reason. Electronic timekeeping reduces calculation errors, creates a clear audit trail for any time edits, and integrates with meal break flagging, daily and weekly overtime calculations, and split shift premium tracking. In the current enforcement environment, the ability to pull a clean, organized report of every shift, break, and edit can make an enormous difference. A pen-and-paper record kept in a binder is legal, but it isn’t going to help much when a plaintiff’s firm requests four years of records.

    2. Can time records be kept electronically?

    Yes, with conditions. California Wage Orders require time records to be kept “in the English language and in ink or other indelible form.”

    The Division of Labor Standards Enforcement (DLSE) addressed electronic storage in two Opinion Letters that don’t perfectly line up:

    – A July 20, 1995 Opinion Letter concluded that electronic storage satisfies California law if the records (1) are retrievable in California and (2) can be printed in indelible format upon request of the employee or the Division.
    – A November 10, 1998 Opinion Letter said the underlying electronic data could be maintained outside California, so long as a hard copy was kept at a central location within the state.

    Because the two letters are not perfectly aligned, the conservative reading is to follow the Wage Orders themselves: records “shall be kept on file by the employer for at least three years at the place of employment or at a central location within the State of California.” As a practical matter, employers should be confident they can produce records — either electronically or on paper — that are stored in California at any time.

    One additional practical recommendation: do not rely entirely on a vendor’s cloud. Download time records periodically and store a copy on your own system. If you change software providers, terminate a vendor relationship, or run into a billing dispute that interrupts access, you don’t want to discover that the records you need to defend a lawsuit are locked behind a portal you can no longer reach.

    3. Electronic pay stubs

    Labor Code section 226 contains language similar to the Wage Orders — deductions must be “recorded in ink or other indelible form, properly dated, showing the month, day, and year,” and a copy must be kept on file for at least three years at the place of employment or at a central California location.

    The DLSE addressed electronic pay stubs in a July 6, 2006 Opinion Letter that approved electronic delivery if the employer meets specific conditions. The DLSE’s stated goal was to harmonize the “detachable part of the check” provision and the “accurate itemized statement in writing” requirement of Labor Code section 226(a) — permitting electronic statements so long as each employee retains the right to elect a paper version and electronic recipients can easily access and convert their statements at no expense.

    In short, the DLSE expects employers to meet the following:

    • Employee election. Any employee may elect to receive paper pay stubs at any time.
    • Complete information by payday. All information required under Labor Code section 226(a) must be available on a secure website no later than payday.
    • Secure access. The website must be controlled by unique employee IDs and confidential PINs, protected by a firewall, and generally available (downtime only for system errors or maintenance).
    • Reasonable accessibility. Employees must be able to access records on their own computers or on company-provided computers, with terminals available at work.
    • Free printing. Employees can print at work, near the access point, at no cost — and may also save or print from home.
    • Three-year retention with continuing access. Electronic statements must be available to active employees for at least three years. Former employees must receive paper copies at no charge upon request.

    The DLSE has not issued comparably detailed guidance specifically endorsing electronic time records, but the underlying analysis is similar. Employers moving in this direction should work with counsel and confirm their system covers each of the items above.

    4. What time records must capture (it’s more than start and stop)

    This is where many employers fall short. The Wage Orders require time records showing “when the employee begins and ends each work period. Meal periods, split shift intervals and total daily hours worked shall also be recorded. Meal periods during which operations cease and authorized rest periods need not be recorded.” (See, e.g., IWC Wage Order 5-2001(7)(a)(3).)

    Labor Code section 1174 adds the requirement to keep records of hours worked daily, wages paid, number of piece-rate units earned, and the applicable piece rate.

    A few practical points worth highlighting:

    • Record meal breaks to the minute. Recording the start and stop time of each meal period — not just total hours worked — is essential. Without those entries, recent case law has applied a presumption against the employer that a compliant break was not provided.
    • No rounding. With electronic timekeeping there is little practical reason to round time entries, and the California Supreme Court has signaled growing skepticism of rounding generally. Recording to the minute is the safer practice.
    • Track premium payments separately. When you pay a meal or rest break premium, identify it clearly on the pay stub. If a plaintiff’s firm later argues no premiums were ever paid, you want a clean record showing exactly when and why each one was issued.
    • Capture split shift intervals. The Wage Orders specifically call this out, but it is easy to overlook unless the system is set up for it.


    5. Records must be maintained in California — and kept long enough to matter

    The Wage Orders and Labor Code section 1174(d) both require records to be kept “at the place of employment or at a central location within the State of California” for at least three years.

    Two practical notes on retention:

    • Three years is the floor, not the ceiling. The statute of limitations for many wage and hour class actions extends back four years under Business and Professions Code section 17200. Most employers should plan on retaining time records and wage statements for at least four years.
    • Make sure the data is actually usable. Saved records do an employer no good if they cannot be reproduced in a format that is accurate and readable. Periodically test your system by pulling a sample of records the way you would have to in litigation. If you cannot easily generate a clean report of clock-in/clock-out times, meal break start and stop times, premium payments, and time edits, fix that now — not after a PAGA notice arrives.

    The bigger picture

    The 2024 PAGA reform changed the calculus significantly. Employers who can demonstrate reasonable steps to comply with the Labor Code prior to receiving a PAGA notice can cap penalties at 15% of the total civil penalties. Employers who take corrective action within 60 days of receiving notice can cap penalties at 30%. Those caps can be the difference between a seven-figure case and a manageable one.

    Reasonable steps don’t come from a single policy document. They come from the combination of lawful written policies, supervisor training, periodic payroll audits, prompt corrective action when issues come up, and — central to all of it — time and pay records that are accurate, complete, properly retained, and able to be produced when needed.

    The technology to do this well is widely available in 2026, and using it has moved closer to an expectation than an option for California employers. If your current system cannot quickly tell you which employees were owed premiums last quarter, which meal breaks were short or late, or which managers have been editing time entries without documentation, those gaps are worth closing before someone else finds them first.

    Artificial intelligence has quietly become part of how work gets done. Employees are using it to draft emails, summarize documents, build spreadsheets, and answer customer questions — often without anyone in management deciding that should happen. For employers, the question is no longer whether AI is in the workplace. It is whether it is being used on the company’s terms, with the right guardrails in place.

    California has also moved quickly. New regulations now govern how employers can use AI in employment decisions, and existing confidentiality and privacy obligations apply to AI just as they apply to everything else. A clear, written AI policy is the most practical way to encourage productive use while managing the risks. Here are five reasons every California employer should have one.

    1. New California regulations now govern AI in employment decisions

    Effective October 1, 2025, the California Civil Rights Council adopted regulations under the Fair Employment and Housing Act (FEHA) addressing “automated-decision systems” (ADS) — broadly, any computational tool that makes or helps make employment decisions. (2 Cal. Code Regs., tit. 2, §§ 11008.1 et seq.)

    The regulations confirm that using an AI tool to assist with hiring, screening, scheduling, evaluations, promotion, or discipline can violate California law if it produces discriminatory results — whether intentionally or through disparate impact — based on protected characteristics. Three points stand out for employers: the rules require retaining ADS-related data for at least four years; liability extends to the employer even when the tool comes from a third-party vendor; and bias testing of a tool is treated as relevant evidence supporting an employer’s defense, while the absence of testing can be used against you. A policy requiring meaningful human review before AI drives any employment decision is the necessary first step.

    2. AI can compromise confidential information and trade secrets

    This is the risk that catches most employers off guard. Many AI tools store the information users submit, process it on outside servers, and may use it to train the underlying model. When an employee pastes pricing, recipes, formulas, supplier terms, or business strategy into a public AI tool, the company can lose control of that information.

    That creates two problems. Information generally qualifies for trade secret protection only if the company takes reasonable steps to keep it secret, and disclosing it to a public AI tool can be treated as a failure to do so. Separately, most employers owe confidentiality obligations to their own customers, guests, and vendors under contracts and nondisclosure agreements — and disclosing that information to an AI tool can breach those agreements. A policy that prohibits entering confidential information into any AI tool without approval draws the line before the leak happens.

    3. Employee and customer privacy obligations still apply

    Feeding personal information about employees, customers, or guests into an AI tool implicates California’s privacy laws, including the CCPA and CPRA. The fact that the information is being handed to software rather than a person does not change the obligation to protect it. A policy should make clear that personal information does not go into an AI tool unless the specific use has been approved and the tool meets the company’s security and privacy requirements.

    4. Accuracy and accountability cannot be outsourced

    AI tools produce confident, polished output that is sometimes inaccurate, incomplete, or entirely fabricated. The employer inherits those errors — in internal work product, in customer communications, and, in some well-publicized cases, in documents filed with courts and agencies. “The AI said so” is not a defense.

    A good policy makes employees responsible for verifying anything they rely on and treats AI output as a first draft rather than a final answer. That single expectation, communicated clearly and in writing, prevents a great deal of avoidable trouble.

    5. Your employees are already using it

    The most important reason may be the simplest. Employees are already using AI at work whether or not their employer has authorized it — often through personal accounts on personal devices. A 2025 Cybernews survey of more than 1,000 U.S. employees found that 59% use AI tools their employer never approved, and that 75% of those workers admit to sharing potentially sensitive information — including employee data, customer details, and internal documents — with those tools. This “shadow AI” is the real status quo. Without leaning into AI, providing safe AI tools for employees to use, and developing an AI policy, employers have no notice of what tools are in use, no monitoring, and no documented expectation that company AI activity is tracked and stored like other technology.

    A policy does not stop employees from using AI. It channels behavior that is already happening into approved tools, with clear rules, monitoring, and a stated lack of any expectation of privacy when using company systems. That is far better than learning about a problem after the fact.

    A practical next step

    An AI policy does not need to be long or complicated to be effective. It should encourage employees to use approved tools, prohibit putting confidential information into AI without approval, require human review of AI-assisted employment decisions, and make clear that company AI use is monitored. We have prepared a model AI use policy and a one-page employee quick guide that our clients are using to put these protections in place. If you would like to discuss adopting a policy for your business — or you are already using AI in any part of your hiring or HR process and want to assess your exposure under the new FEHA regulations — we are happy to help.

    California employers face one of the most complex and actively enforced wage-and-hour landscapes in the country, and most of that complexity gets triggered the moment a schedule is built. Daily overtime, meal and rest break timing, premium pay obligations, split shifts, reporting time pay, and PAGA exposure all flow from how shifts are scheduled and recorded. This week’s Friday’s Five walks through five scheduling-related issues that California employers should review now, drawn from the topics we covered in our recent masterclass on this subject.

    1. Predictive scheduling: California has no statewide rule, but local ordinances and existing wage laws still constrain how you schedule.

    California has no statewide predictive scheduling requirement. Bills have been proposed nearly every year going back to at least SB 878 in 2016 (which would have required 28 days’ advance notice for retail, grocery, and restaurant employers), but none have passed. Local ordinances do apply, however — the Los Angeles Fair Work Week Ordinance covers certain retail employers in the City and County of Los Angeles, and Berkeley, Emeryville, and San Francisco have their own ordinances as well. Employers should check whether any local ordinance applies to their workforce and industry.

    Even without a statewide predictive scheduling statute, California’s existing rules — daily overtime, meal and rest break timing, split shifts, and reporting time pay — already constrain how schedules can be set and changed, and the penalties for getting any of them wrong are significant.

    Even without a predictive scheduling statute, California employers should treat scheduling as a compliance function with seven-figure exposure if it is managed poorly.

    2. Meal breaks still drive the majority of wage-and-hour litigation — get the basics right and use the new waiver guidance from Bradsbery.

    Meal break claims continue to drive the majority of California wage-and-hour cases. The framework comes from Brinker Restaurant Group v. Superior Court (2012): for non-exempt employees working more than five hours in a day, the employer must provide a 30-minute meal break that begins before the end of the fifth hour. For shifts over ten hours, a second 30-minute meal break must begin before the end of the tenth hour. The employer’s duty is to provide the meal period, not to police it — but in practice we continue to recommend forcing employees to clock out for the full 30-minute break. When records show employees consistently working through breaks, the recent line of cases creating a presumption against the employer becomes very difficult to overcome.

    On waivers, Bradsbery v. Vicar Operating, Inc. (April 2025) clarified that prospective, written, revocable meal period waivers signed at the outset of employment are enforceable for shifts between five and six hours, provided the employee voluntarily consents, understands the waiver, can revoke the waiver at any time, and is not coerced into signing it. Waivers should be standalone documents with clear language addressing both the first and second meal break, not buried inside an onboarding packet. Do not confuse the meal break waiver with an on-duty meal period — the on-duty meal period is available only in very limited circumstances and should not be relied on absent specific legal advice.

    Meal break compliance is the first thing plaintiffs’ counsel reviews when they get an employee’s time records — get the records right and consider implementing standalone onboarding waivers consistent with Bradsbery.

    3. Pay the premium proactively — it is the single most effective way to build the PAGA reasonable steps defense.

    When a meal or rest break is missed, late, or short, the employer owes one hour of pay at the employee’s regular rate of pay. The premium is capped at one meal period premium and one rest period premium per workday. Remember that the regular rate of pay calculation — not the base rate — governs the premium, so non-discretionary bonuses, commissions, and service charge distributions need to be folded in.

    The 2024 PAGA reform created a critical incentive to pay these premiums proactively. Default PAGA exposure is $100 per pay period per aggrieved employee for initial Labor Code violations and $200 per pay period for subsequent violations, with a one-year reach-back from the LWDA notice. For a mid-sized operation, default exposure regularly reaches seven figures. The reformed statute caps civil penalties at 15% if the employer can prove it took all reasonable steps to comply with the Labor Code provisions identified in the notice before receiving the notice, and at 30% if the steps are taken within 60 days after receiving the notice. Reasonable steps include periodic payroll audits with documented corrective action, lawful written policies disseminated to employees, training of supervisors on the applicable Labor Code and Wage Order requirements, and appropriate corrective action against supervisors who fail to follow the law.

    Paying a handful of premiums voluntarily over the course of a year — and recording them clearly on the pay stub — creates the documented record of proactive compliance the defense rewards. It also shifts the burden in litigation: when a plaintiff claims they were never told they could complain about a missed break, you can point to the other employees who were paid premiums during the same period.

    California employers should pay premiums proactively when a missed, late, or short break is identified — the documented record of voluntary payment is one of the cleanest reasonable steps under the reformed PAGA and can drop maximum exposure to a fraction of what it would otherwise be.

    4. Timekeeping records are your first line of defense — and off-the-clock work will undermine them.

    California Labor Code requires employers to maintain accurate time records and to keep them for at least three years (generally most employers retain the records for four years to align with the four-year statute of limitations on derivative unfair competition claims). Practical recommendations: use an electronic timekeeping system; record the start and stop of each work period and each 30-minute meal period; have employees record their own time (no buddy-punching, no manager-entered times absent documented reason); and do not round. The California Supreme Court is currently considering rounding generally, but a recent Court of Appeal decision has already rejected rounding when recording meal periods.

    When supervisors approve time records, they should be looking for the warning signs that plaintiffs’ counsel will look for: late, short, or missing meal breaks; clock-in and clock-out times that are consistently round numbers (always 3:00 p.m., never 2:59 or 3:03); and times that exactly match the schedule. Any time edits should be documented (original time, new time, reason, who approved) and acknowledged by the employee. Rest breaks need not be recorded under California law — and an end-of-shift attestation that the employee took all rest breaks gives you a defensible record.

    Off-the-clock work is the area where good timekeeping practices most commonly break down. The rule is absolute: all hours worked by hourly employees must be compensated, even if the employee volunteers to work without pay. When you discover off-the-clock work, the response is the same every time — edit the time record with the employee’s acknowledgment, pay the time, document the correction, and discipline the employee or supervisor as appropriate. The instinct to minimize or paper over the issue is exactly the wrong one. A documented record of catching and correcting off-the-clock work shows that the policy has teeth, which is what protects the company when the issue surfaces in litigation.

    California employers should treat time records as litigation exhibits in the making and audit them with that mindset — and when off-the-clock work is identified, the only acceptable response is to pay it, document it, and correct the underlying behavior.

    5. Split shifts and reporting time pay are sleeper issues — address them at the scheduling stage.

    Split Shifts:

    A split shift exists when the employer establishes an unpaid, non-working gap (other than a bona fide rest or meal period) between two work segments — for example, an employee who works 10:00 a.m. to 1:00 p.m. and then again from 3:00 p.m. to 8:00 p.m. The DLSE’s position is that an unpaid period of more than one hour constitutes a split shift, and conservative employers cap meal periods at one hour to stay clear of the issue. The employee is owed one additional hour of pay at the minimum wage for that workday, but wages earned that day above the minimum wage can be used to offset the premium. Higher hourly rates often eliminate exposure entirely. Important distinction: the premium is only triggered when the employer establishes the gap. If the employee asks for a two-hour gap to run an errand or pick up a child, no premium is owed — but document the employee request every time.

    Reporting Time:

    Reporting time pay applies when an hourly employee reports to work as scheduled but is sent home early or not provided their full scheduled shift. The amount owed to the employee under the reporting time rule is at least half the scheduled hours, with a floor of two hours and a ceiling of four hours, at the regular rate of pay. Reporting time is not triggered when operations are disrupted by causes outside the employer’s control, when the employee is unfit or unwilling to work, when the employee was informed of the schedule change in advance, or when the employee voluntarily leaves work early.

    Three cases worth knowing. Ward v. Tilly’s, Inc. held that requiring employees to call in two hours before a potential shift can itself constitute “reporting” and trigger reporting time pay — on-call scheduling structures need to be reviewed carefully. Price v. Starbucks held that when an employer schedules a meeting of unspecified duration on an employee’s non-scheduled day, two hours of reporting time pay is owed (not half of a regular shift). Aleman v. AirTouch confirmed that when an employer schedules a meeting in advance for a specified duration (such as one hour) and the meeting lasts at least half the scheduled time, no reporting time pay is triggered — a useful structure for short, defined shifts.

    One scenario that surprises employers: if you schedule an employee for an eight-hour shift and terminate them on arrival, reporting time pay is owed because you have effectively sent them home early from a scheduled shift. The cleaner approach is to allow the employee to work at least half of the scheduled shift before delivering the termination, where the circumstances allow.

    California employers should evaluate split shift exposure and reporting time obligations when the schedule is built — not after the shift is worked, the meeting is held, or the termination is delivered.