As we move through 2026, it remains the perfect time for California employers to return to the fundamentals. With evolving employment laws, local ordinances, aggressive enforcement, and high volumes of wage-and-hour and PAGA claims, getting the basics right continues to separate smooth operations from costly litigation and penalty exposure.
The 2024 PAGA reforms remain central: employers that can document “reasonable steps” to comply with the Labor Code before (or promptly after) a PAGA notice can significantly cap penalties. Routine audits of core wage-and-hour practices are one of the clearest ways to build that record.
This article focuses on five common wage-and-hour issues California employers should routinely audit. Whether you are scaling a team or managing a long-standing workforce, use this as a practical checklist to stay compliant and protect the business.
1. Payroll Compliance: The Foundation
Payroll is more than issuing paychecks on time. Employers must ensure systems and practices meet California’s detailed requirements:
- Established Workweeks and Paydays: Workweeks must be clearly defined, and paydays consistently scheduled within the required timelines.
- Wage Statements: Itemized wage statements must meet all statutory requirements under Labor Code section 226. Common problems include missing or inaccurate hours worked, incorrect rates, omitted employer name/address, or incomplete information.
- Sick Leave Accruals and Balances: Each pay period must include written notice of available paid sick leave (or paid time off provided in lieu of sick leave) on the wage statement or in a separate writing provided on the payday, as required by Labor Code section 246(i). State minimums (generally 40 hours/5 days) still apply, and many local city and county ordinances impose additional or more generous requirements—employers must follow the most protective applicable rule.
- Vacation Tracking: Vacation policies must be documented, accurately tracked, and accrued benefits properly reflected. Unused vested vacation is wages that must be paid out on termination.
2. Wages and Deductions: Avoiding Costly Errors
Errors in deductions or reimbursements frequently generate penalties and PAGA exposure.
- Permitted Deductions: California allows only a narrow list of deductions. Err on the side of caution and consult counsel before withholding anything beyond taxes, authorized benefits, or other specifically permitted items.
- Expense Reimbursement: Employees must be reimbursed for necessary work-related expenses (uniforms, personal cell phone use for work, mileage, tools, etc.) under Labor Code section 2802.
- Final Paychecks: On termination (voluntary or involuntary), final pay must include all earned wages and accrued but unused vacation and must be provided within the strict timelines required by California law.
3. Employee Classification: Exempt vs. Nonexempt (and Independent Contractors)
Misclassification remains a top litigation trigger.
- Exempt Status Review: Duties and salary must satisfy California’s specific tests. Titles alone never determine exemption. As of January 1, 2026, the minimum salary for the executive, administrative, and professional exemptions is generally $70,304 annually ($1,352 per week)—twice the statewide minimum wage of $16.90 per hour. (The statewide minimum wage is scheduled to rise to $17.40 on January 1, 2027, which will further increase the exempt salary threshold.) Local minimum wages and industry-specific rates (fast food, healthcare, etc.) may also affect the analysis. Re-test classifications regularly.
- Independent Contractors: Continue to apply the ABC test under AB 5 and related law with caution. True independent contractor status remains difficult to establish in many common arrangements.
4. Timekeeping: Precision Prevents Problems
Timekeeping issues remain among the most frequently litigated wage-and-hour claims.
- Overtime Tracking: Nonexempt employees must be paid correctly for all overtime (daily after 8 hours, weekly after 40, seventh-day rules, etc.). Policies should clearly prohibit unauthorized off-the-clock work.
- Training Managers: Managers must be trained to identify and prevent off-the-clock work and understand the consequences of ignoring or encouraging violations. Documented training supports “reasonable steps” under the reformed PAGA.
- Time Rounding: If rounding is used, the policy must be neutral and not result in underpayment over time. Meal-period time punches cannot be rounded (Donohue v. AMN Services). Whether California employers may continue to use neutral time-rounding policies for total hours worked—especially when electronic systems already capture time to the minute—is under review by the California Supreme Court in Camp v. Home Depot. Employers are strongly cautioned about relying on rounding given the evolving case law and technological ability to record exact time. Paying for actual time recorded is the safer approach in most cases.
5. Meal and Rest Breaks: Small Breaks, Big Liability
Meal and rest break violations remain a primary driver of class actions and PAGA claims.
- Handbook and Reminders: Policies must be clearly documented in the handbook and regularly communicated to employees.
- Recordkeeping and Training: Employees should record meal breaks. Managers must be trained to monitor compliance, address issues promptly, and escalate problems. Time records showing noncompliant meal periods create a rebuttable presumption of violations.
Under the 2024 PAGA reforms, employers that can prove they took “reasonable steps” to comply before receiving a PAGA notice may significantly cap penalties (as low as 15% in appropriate cases). For meal and rest breaks, this typically means documented regular audits of break compliance, clear written policies, supervisor training with records retained, prompt corrective action when issues surface, and follow-up verification that fixes were implemented.
For a deeper discussion of what “reasonable steps” actually look like in practice in 2026—and how they can reduce both PAGA and broader employment litigation exposure—see What “Reasonable Steps” Really Mean in 2026.
Final Thought: Routine Audits Are a Must
Employment laws and enforcement priorities do not stand still—and neither should compliance practices. Schedule at least a semiannual (or more frequent) audit of these core areas, or partner with employment counsel to review them. Document the steps you take. Under the 2024 PAGA reforms, a well-documented program of reasonable compliance efforts can materially reduce penalty exposure.
A proactive approach in 2026 reduces risk, strengthens operations, and demonstrates a genuine commitment to treating employees fairly while protecting the business.
Join us for an upcoming webinar:
On Thursday, August 27 from 10:00 AM – 11:00 AM, Harri and Zaller Law Group will present “All Reasonable Steps”: The New Standard That Decides Who Wins a PAGA Claim. California rewrote the rules of PAGA—the employers who come out ahead in 2026 won’t be the ones who avoid every violation; they’ll be the ones who can prove they built the systems to catch and fix them. We’ll break down the reform (AB 2288 and SB 92), how courts and the LWDA evaluate “reasonable steps,” the four pillars of a defensible program (audits, policies, training, and accountability), what to do in the 60-day window after a notice arrives, and what the 2026 filing landscape signals for what’s next. Register now and get ahead of the reasonable-steps standard before it gets ahead of you.