HR compliance in California is not just a best practice; it is essential risk mitigation that directly protects your company’s cash flow. California small business owners, who typically handle HR without dedicated staff, must immediately focus on three high-stakes areas for the upcoming year: the $70,304 exempt salary threshold, Private Attorneys General Act (PAGA) exposure, and new AI in hiring regulations. Every business must audit all employee classifications by the end of the year, ensuring non-exempt workers receive legally mandated meal and rest breaks to avoid costly PAGA claims. Update your employee handbook to include the new $70,304 minimum salary for exempt employees and the new Workplace Know Your Rights Act notice, which becomes mandatory in early 2026. Proactively running a targeted HR compliance audit focused on wage and hour records represents the most effective defense against significant penalties from the Division of Labor Standards Enforcement (DLSE) and civil lawsuits.
The Imperative for HR Compliance: Protecting Small Business Stability
California’s employment laws impose the nation’s highest compliance burden on business owners. Even unintentionally, ignoring employment rules can trigger devastating PAGA or class-action lawsuits. These lawsuits carry substantial penalties, far exceeding the minimal cost of proactive prevention. For a small business owner without dedicated HR resources, compliance equals immediate financial and legal protection. Focusing on a targeted checklist makes this complex task manageable and scalable.
Action Item 1:
Recalibrating Wage and Classification for Next Year’s DOL Focus
Wage and hour violations represent the single most significant liability risk for small California businesses. The Division of Labor Standards Enforcement (DLSE) and opportunistic plaintiff attorneys aggressively enforce these rules.
Conduct an Immediate FLSA Exemption Audit
You must immediately review every position classified as “salaried.” To maintain exempt status for administrative, executive, and professional employees, workers must satisfy both the duties test and the salary test. The state minimum wage increase directly raises the annual salary threshold.
Verify Salary Basis and Duties Tests Against New Thresholds
Effective January 1, 2026, the statewide minimum salary for most exempt employees will climb from $68,640 to $70,304 annually ($5,858.67 monthly). Failure to meet this threshold automatically reclassifies a worker as non-exempt, making the business liable for all past unpaid overtime. Non-exempt employees must spend more than half their working time performing intellectual, managerial, or professional duties.
Secure Time-Tracking for Non-Exempt Remote Workers
California requires meticulous tracking of all time worked, including any time spent checking email or taking calls outside scheduled hours. Non-exempt employees are entitled to a paid 10-minute rest break for every 4 hours worked and a 30-minute unpaid meal period for shifts over 5 hours. The employer must ensure the opportunity to take these breaks, not just offer it.
Mandate Accurate Recording of All Working Hours
Penalties for missed, late, or incomplete meal and rest breaks are 1 hour of penalty pay per violation. These premium payments quickly become the basis for PAGA lawsuits. Implement a verifiable, modern time-tracking system that captures daily certifications for rest and meal periods.
Re-Validate All Independent Contractor (1099) Agreements
Misclassification of an employee as an independent contractor (1099) remains a costly violation under California’s stringent ABC test. The DLSE aggressively pursues businesses that fail the ABC test’s B prong, which requires the contractor to perform work outside the usual course of the hiring entity’s business. Audit all 1099 relationships immediately to confirm genuine independent status and mitigate liability for back taxes, benefits, and severe PAGA penalties.
Action Item 2:
Navigating the Multi-State and Legislative Compliance Maze
California continuously introduces new laws that grant employees’ rights exceeding federal standards, impacting even small operations.
Update Notices for New State Labor Laws and Notices
The Workplace Know Your Rights Act becomes effective in early 2026. It requires employers to provide a new written notice detailing workers’ rights upon hire and annually. Ensure your mandatory state labor posters are updated to reflect the latest state minimum wage of $16.90 per hour and any higher local minimum wages. California also passed laws expanding leave eligibility for crime victims and requiring updated Cal-WARN notices for mass layoffs.
Standardize Compensation Data for Transparency Law Mandates
California’s pay transparency law requires employers with 15 or more employees to include a pay scale in job postings. New amendments for 2026 clarify that “pay scale” must include a good-faith estimate of all expected compensation forms, including bonuses and stock options. This mandate requires documenting and standardizing compensation ranges for every role.
Audit Algorithmic Hiring Tools for Bias and Disclosure
New California regulations, effective late 2025, prohibit the use of Automated Decision Systems (ADS), including AI tools for screening or hiring, that result in discrimination based on protected characteristics. If your company uses any system that scores resumes or analyzes interview data, you must audit the tool for bias. Maintain detailed records of all AI-related decisions and bias testing for at least four years.
Action Item 3:
Executing the Critical HR Compliance Audits
Proactive HR compliance audits identify and fix internal gaps before a regulator or attorney discovers them. For a small business, a focused annual audit is crucial.
Perform a Zero-Tolerance Form I-9 Documentation Audit
All employees must complete Form I-9 for employment eligibility verification. U.S. Immigration and Customs Enforcement (ICE) issues substantial fines for even minor technical errors, such as incorrect dates or missing signatures. Review every Form I-9 for timely completion and proper retention of documentation.
Review and Acknowledge the Annual Employee Handbook Revision
The employee handbook review is your primary defense against litigation. Revise it annually to incorporate all new state and local laws. This includes updating anti-harassment policies, new leave entitlements, and the new minimum wage/exempt salary details. Require every employee to sign a fresh acknowledgment form for the updated handbook.
Ensure Cal/OSHA Safety Standards and Mandated Injury Reporting
Cal/OSHA enforces strict workplace safety standards, which are often more stringent than federal rules. Review your Injury and Illness Prevention Program (IIPP) to ensure it addresses all relevant safety hazards. You must correctly record and report all serious injuries and illnesses on the Cal/OSHA Form 300 log.
Frequently Asked Questions (FAQs) for HR Compliance
What is the single most significant HR compliance risk for California small businesses?
PAGA lawsuits pose the highest risk; they allow an employee to sue on behalf of all current and former employees for technical wage-and-hour violations, thereby multiplying potential penalties exponentially.
How often should we conduct an HR compliance audit?
Perform a comprehensive internal HR compliance audit annually, ideally before January 1, to align with the new effective dates, and a targeted wage-and-hour audit quarterly.
Does federal law always supersede state law in California HR matters?
No. California law follows the principle that the law providing the greatest protection or benefit to the employee always prevails, which almost universally means California’s state or local regulations apply.
Which local ordinances must I check in addition to state law?
You must check local minimum wage ordinances (e.g., San Francisco, San Jose, Los Angeles) and local paid sick leave laws, which may exceed the statewide minimums.
Need Help?
For California small businesses operating without dedicated HR staff, the legal landscape poses a constant and severe risk to stability and profit. You do not have to navigate the DLSE, PAGA, and new AI regulations alone. The Windes Human Capital Consulting team offers the tailored, cost-effective HR expertise your business needs. They act as a flexible extension of your operations. We provide strategic guidance on complex issues, including the $70,304 exempt threshold; conduct rigorous HR compliance audits to shield you from PAGA litigation; and develop custom employee handbooks and policies that meet California’s unique requirements. Contact the Windes Human Capital Team and replace compliance anxiety with expert confidence, so you can focus on managing and growing your business. At the same time, Windes secures your most valuable resource: your people.
Windes Human Capital Team
The Windes Human Capital team acts as a flexible, expert resource, helping a small business owner move beyond administrative panic and focus on strategic design and risk management for their benefits package. Contact the Windes Human Capital Team today for assistance.
Eileen Harris, Esq.
Chief Human Resources Officer
Human Capital Practice Leader
Eileen provides clients with a full range of integrated consulting services including recruitment services, personnel audits, employee handbook review and development, policies and procedures manuals, compliance services, termination services, performance appraisal systems, employee incentive programs, and training and dev
elopment.