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.

California employers face constant pressure to make personnel decisions quickly. Terminations, separations, performance issues, and new hires often cannot wait for a lawyer’s calendar. The most effective way to handle these routine but high-risk situations is to have a core set of documents drafted, reviewed, and approved by employment counsel in advance. When the situation arises, the employer reaches for a template counsel has already blessed rather than starting from scratch—and routine issues can be handled without burning time and legal fees on each one.

It goes without saying that an employee handbook should be on every California employer’s list and reviewed at least annually given the volume of new statutes, regulations, and case law each year. Beyond the handbook, here are five documents every California employer should have prepared, reviewed by counsel, and ready to deploy.

1. Performance Improvement Plan (PIP) and Discipline Template

California is an at-will employment state, but at-will rarely wins a case standing alone. Wrongful termination, discrimination, and retaliation claims usually turn on whether the employer’s stated reason holds up under scrutiny, and that depends on contemporaneous, consistent documentation of performance concerns. A pre-approved PIP and discipline template forces managers into the right format before urgency or emotion takes over.

A counsel-blessed template should prompt the manager to record the specific performance deficiency, the standard expected, a measurable benchmark, the timeframe for improvement, the support being offered, the consequences of failing to improve, and contemporaneous signatures from the employee and supervisor. The recurring documentation failures that show up in litigation—vague performance concerns, missing dates, no measurable goals, retroactive write-ups created after a complaint, and inconsistent application across employees—are largely eliminated when a standardized template is in use.

Two additional considerations are worth building into the template. First, when a known or suspected disability is in play, a PIP cannot substitute for the interactive process under FEHA. The template should include a checkpoint reminding the manager to assess whether an accommodation discussion is required before the PIP is issued. Second, consistency matters as much as content. Disparate discipline across protected classes is one of the most common pretext theories plaintiffs raise, so a brief HR or counsel sign-off step for higher-risk situations is worth including.

Bottom line: A pre-approved PIP and discipline template turns documentation from a manager’s afterthought into a defensible, repeatable practice.

2. Arbitration Agreement

A current, enforceable arbitration agreement remains one of the most effective risk-management tools available to California employers, but only if it has been updated to reflect the rapid evolution of case law in this area. The Supreme Court’s decision in Viking River Cruises v. Moriana, the California Supreme Court’s response in Adolph v. Uber Technologies, and the Ninth Circuit’s resolution of AB 51 in Chamber of Commerce v. Bonta have each reshaped what an enforceable agreement looks like.

Adolph in particular changed how PAGA representative actions interact with individual arbitration, and Iskanian-era language that was state-of-the-art a few years ago can now create more problems than it solves—especially where severability clauses fail to carry their weight. Federal Arbitration Act preemption issues, jury waiver language, attorney’s fees provisions, class action waivers, and the scope of claims covered all warrant regular review.

Employers should also remember that an arbitration agreement is only as good as the implementation around it. Tracking who signed, when, and which version was in force is a recurring weak point that surfaces when motions to compel arbitration are filed years after the agreement was executed.

Bottom line: An arbitration agreement is a living document. It should be revisited at least annually and rewritten whenever a major decision shifts the legal landscape.

3. Offer Letter and New Hire Packet

The offer letter is just the cover sheet. California stacks a series of mandatory disclosures and notices on top of every new hire, and the new hire packet is where those obligations are met. A complete, counsel-reviewed packet typically includes the Labor Code section 2810.5 wage notice, paid sick leave information, the sexual harassment prevention pamphlet, the workers’ compensation rights notice, EDD pamphlets, the CRD’s discrimination and harassment notice, and the SB 294 emergency contact opportunity that took effect in 2026.

The offer letter itself also needs current eyes. SB 642 redefined “pay scale” to mean the wage range the employer reasonably and in good faith expects to pay for the position upon hire, which may narrow the ranges employers post and quote. AB 692 broadly bans most “stay-or-pay” provisions in employment contracts entered into on or after January 1, 2026, which directly affects relocation reimbursement language, sign-on bonus clawbacks, and tuition assistance arrangements—areas that previously could be handled with boilerplate.

A pre-approved offer letter and new hire packet ensures hiring decisions can move at the speed the business needs without creating compliance gaps that surface years later in a class or PAGA claim.

Bottom line: A new hire packet is not a stack of paper. It is the employer’s first compliance checkpoint, and California adds new layers to it nearly every year.

4. Short-Form Release and/or Severance Agreement

A pre-approved short-form release agreement allows employers to handle routine separations on a same-day basis instead of waiting for counsel to draft custom language for each situation. The savings compound quickly: a counsel-blessed template can convert what would otherwise be a two-week lawyer engagement into a same-day decision for routine matters where modest separation pay is offered in exchange for a release of claims.

The legal scaffolding has shifted significantly. The Silenced No More Act (Code of Civil Procedure section 12964.5) restricts confidentiality and non-disparagement provisions covering claims of harassment, discrimination, and retaliation. AB 749 limits no-rehire clauses. The Older Workers Benefit Protection Act still requires the 21-day consideration and 7-day revocation periods for releases involving employees age 40 and over, and group reductions in force trigger additional disclosure obligations. Civil Code section 1542 waivers must be expressly invoked, and several categories of claims—workers’ compensation, unemployment, certain whistleblower retaliation, and indemnification rights, among others—cannot be waived even with the cleanest release language.

Templates also benefit from clear instructions on when they can be used as-is and when counsel involvement is required. Routine voluntary separations with low-risk profiles often fit the template; situations involving recent complaints, leaves of absence, suspected protected activity, or larger payouts should always come back to counsel.

Bottom line: A counsel-approved short-form release pays for itself the first time it lets the employer close a routine separation in hours instead of weeks.

5. Employee Separation Packet

Final pay timing under Labor Code sections 201 through 203 is one of the most common—and most preventable—sources of waiting-time penalty exposure. A pre-built separation packet, organized to be ready on the day of termination or the next business day in the case of a resignation without notice, eliminates most day-of mistakes.

A complete packet typically includes the final paycheck reflecting all wages earned, accrued vacation, and any required premium pay; the EDD’s “For Your Benefit” pamphlet; the change-in-relationship notice; COBRA and Cal-COBRA continuation notices; the HIPP notice; benefits termination information; final expense reimbursement; return-of-property documentation; and, where applicable, the short-form release described above. The separation packet is also where post-employment obligations such as confidentiality, trade secrets, and any enforceable restrictive covenants are confirmed in writing.

Bottom line: A separation packet is the difference between a clean exit and a section 203 waiting-time penalty claim or other litigation exposure.

Closing Thoughts

These five documents—the PIP and discipline template, arbitration agreement, offer letter and new hire packet, short-form release, and separation packet—cover moments when employers most often need to act quickly and where the cost of getting it wrong is highest. Having them prepared, reviewed by counsel, and ready to deploy is not a substitute for legal advice on novel or high-stakes matters; it is what frees counsel to focus on those matters when they arise. For employers managing day-to-day personnel decisions across a California workforce, this small library of pre-approved documents is one of the highest-leverage investments available.

July 1 is just around the corner, and with it comes another wave of local minimum wage increases across Southern California. For employers operating in multiple jurisdictions—particularly those with hotel, hospitality, or healthcare workers—the compliance landscape continues to grow more complex. Beyond the day-to-day importance of paying the correct rate, accurate wage compliance is now a frontline defense issue: under the 2024 PAGA reform, an employer’s documented “reasonable steps” toward compliance can cap penalties at 15% (or 30% if the steps are taken after notice). Getting wage rates right—and being able to prove it—has never carried more weight.

Below is a breakdown of the new rates, followed by a five-step compliance checklist tailored for California employers.

Minimum Wage Increases in Southern California (Effective July 1, 2026)

  • Los Angeles County (Unincorporated Areas): $18.47/hour (up from $17.81)
  • City of Los Angeles: $18.42/hour (up from $17.87)
  • Pasadena: $18.57/hour (up from $18.04)
  • Santa Monica: $18.47/hour (up from $17.81) (Santa Monica’s general minimum wage is aligned with the unincorporated Los Angeles County rate)
  • West Hollywood: Non-hotel workers: $20.25 (no increase from the January 1, 2026 increase), Hotel Workers: $20.87/hour (up from $20.22).
  • City of San Diego: $17.75/hour (effective January 1, 2026, no July 1, 2026 increase scheduled).
  • City of Malibu: $17.91/hour (up from $17.27/hour for the 2025-2026 year).

In addition, several Southern California cities have enacted hospitality-specific minimum wages that take effect or escalate on July 1, 2026—addressed in Step 4 below. Other jurisdictions throughout California also have their own minimum wage ordinances. Employers should verify all applicable rates based on each employee’s work location.

5-Step Compliance Checklist for Employers

1. Identify All Applicable Jurisdictions

Determine where your employees are performing work. Local minimum wage ordinances are based on work location, not where the business is headquartered or where the employee resides. In most ordinances, an employee who performs as little as two hours of work within the city or county boundary in a workweek is entitled to that jurisdiction’s minimum wage for those hours. For employees who work across multiple cities, the highest applicable minimum wage controls.

Employer takeaway: Map your workforce by physical work location—including remote employees and field staff—before July 1 so payroll runs the right rate from day one.

2. Update Wage Notices, Pay Stubs, and Workplace Postings

Three compliance items must be addressed simultaneously:

  • Notice to Employee Forms (Labor Code 2810.5): Update wage rate notices for all non-exempt employees affected by the increase.
  • Pay Stubs: Confirm pay stubs accurately reflect the new hourly rate, including overtime calculations and any premium pay.
  • Workplace Postings: Most jurisdictions require employers to post the official local minimum wage notice in a conspicuous location at each worksite. The Cities of Los Angeles, Pasadena, and Santa Monica, along with Los Angeles County, all publish updated posters annually. Make sure your postings are current, legible, and posted in any language spoken by 5% or more of your workforce.

Employer takeaway: A missed posting or stale wage notice is among the easiest violations to spot in a Labor Commissioner audit or PAGA notice—and among the easiest to fix before July 1.

3. Audit Multi-Jurisdiction Work

For employees who perform work in more than one city or county—delivery drivers, traveling technicians, sales staff, and increasingly remote employees splitting time between locations—your payroll system must calculate wages based on the higher applicable rate for each pay period.

Employer takeaway: Build a process to track work locations week-by-week, not just on hire. Remote work has made this issue dramatically harder—and dramatically more important.

4. Review Industry-Specific Rates

Several sectors have minimum wage rates that exceed any local ordinance and are also changing on or around July 1, 2026:

  • Hotel Workers in the City of Los Angeles: Under the Citywide Hotel Worker Minimum Wage Ordinance, hotel workers at properties with 60 or more guest rooms must be paid at least $25.00/hour effective July 1, 2026, plus a new $8.15/hour health benefit (paid as additional wages if equivalent benefits are not provided). The rate will rise to $27.50 in 2027 and $30.00 in 2028.
  • Santa Monica Hotel Workers: Tied to the City of Los Angeles hotel worker rate, projected to increase to $25.00/hour effective July 1, 2026.
  • West Hollywood Hotel Workers: $20.87/hour effective July 1, 2026 (through June 30, 2027).
  • City of San Diego Hospitality Workers: A new ordinance takes effect July 1, 2026, requiring $19.00/hour for covered hotels and amusement parks (150+ guest rooms or designated venues) and $21.06/hour for covered event centers, with phased increases reaching $30.00/hour by July 2030.
  • Healthcare Workers: Under SB 525, healthcare worker minimum wages step up again on July 1, 2026. Most large hospitals, integrated systems, and dialysis clinics move to $25.00/hour. Most other covered facilities, including skilled nursing facilities, move to $23.00/hour. The rates vary by facility classification, so verify your specific category.
  • Fast Food Workers: The statewide rate remains $20.00/hour for covered national fast food chain establishments. The Fast Food Council retains authority to adjust this rate.

Employer takeaway: If you operate in hospitality or healthcare, the industry-specific rate almost always controls over the local rate—and the gap is widening every year.

5. Document Your Compliance Steps and Communicate with Your Workforce

Two pieces here, and both matter under the post-reform PAGA framework. First, communicate the changes to your workforce in advance—when the change takes effect, what the new rate is, and what employees should expect to see on their pay stubs.

Second—and equally important—document the steps you took. The 2024 PAGA reform made an employer’s “reasonable steps” toward compliance a central component of the penalty calculation, with caps at 15% (proactive) or 30% (after notice) for employers who can demonstrate good-faith compliance efforts. Keep records showing when you identified applicable jurisdictions, when you updated payroll, when you posted new notices, and when you communicated the changes. If a PAGA notice arrives twelve months from now, that documentation is your defense.

Employer takeaway: Compliance isn’t just doing it right—it’s being able to prove you did it right. Build the record now.

Bottom Line for Employers

  • Confirm the correct July 1, 2026 minimum wage rate for every work location, including remote employees.
  • Update Labor Code 2810.5 wage notices, pay stubs, and workplace postings before July 1.
  • Audit multi-jurisdiction work and confirm your payroll system applies the highest applicable rate.
  • Verify whether industry-specific rates (hotel, airport, healthcare, fast food) apply to any portion of your workforce.
  • Communicate the changes to employees in writing in advance.
  • Document every compliance step taken—dates, decisions, and verifications—to support a “reasonable steps” defense under PAGA.

California’s patchwork of local wage laws continues to grow more complex, and the consequences of getting it wrong are no longer just back wages—they are PAGA penalties, and class action exposure. By reviewing your policies and procedures now, you can avoid last-minute headaches and ensure you’re on solid legal footing well before the July 1 deadline.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here are five practical takeaways for California employers.

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

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

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

2. Delegation clauses remain powerful.

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

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

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

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

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

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

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

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

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

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

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

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

Five AI Strategies California Employers Should Be Executing Right Now

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

Here are five things you should be doing right now.

1. Own the Platform. Own the Data.

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

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

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

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

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

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

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

What your AI policy needs to do right now:

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

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

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

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

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

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

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

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

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

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

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

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

What this looks like in practice:

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

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

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

5. Audit Your Vendors, Contracts, and Insurance.

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

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

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

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

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

The Bottom Line

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here are five things California employers need to know.

1. What Is a “Headless” PAGA Claim?

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

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

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

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

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

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

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

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

3. Why This Split Matters Practically

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

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

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

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

4. The California Supreme Court Is About to Decide

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

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

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

5. What Employers Should Be Doing Right Now

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2. AI Efficiency Is Changing What You Are Paying For

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

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

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

Consider a simple example.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That is changing.

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

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

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

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

Bottom Line for Employers

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

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

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

Action Checklist

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