Recent federal efforts to modernize employment regulations—including proposed changes to independent contractor classifications and the rollback of expanded overtime rules, have been welcomed by many businesses across the country. However, California employers should not assume these federal developments reduce their legal obligations.
California maintains one of the nation's most employee-protective labor law systems, with standards that frequently exceed federal requirements. As a result, employers operating in California remain subject to rigorous wage-and-hour laws, employee classification rules, and litigation risks regardless of federal policy changes.
According to Paul P. Cheng, former prosecutor, mediator, and seasoned trial attorney, one of the biggest mistakes employers make is assuming federal compliance automatically means California compliance.
"California employers must understand that federal law often establishes the minimum standard, not the controlling standard. In California, employers generally must comply with the stricter state requirements, and overlooking that distinction can lead to costly litigation."
Below are five of the most common—and expensive—mistakes employers make that frequently become the focus of employment lawsuits.
1. Misclassifying Exempt Employees Without Evaluating Their Actual Job Duties
One of the most common litigation mistakes involves exempt employee classifications.
While both federal and California law recognize exemptions for executive, administrative, and professional ("EAP") employees, California applies a significantly stricter "primary duties" test.
Unlike federal law, California generally requires exempt employees to spend more than 50% of their working time performing exempt duties. Job titles alone are insufficient.
Employers who fail to evaluate how employees actually spend their time may face claims involving:
- Unpaid overtime
- Meal and rest break violations
- Waiting time penalties
- Wage statement penalties
- Representative actions under California's Private Attorneys General Act (PAGA)
"Many employers rely on job descriptions drafted years ago without confirming whether employees' daily responsibilities have changed," Cheng explains. "When litigation begins, courts examine actual job duties—not titles."
2. Failing to Update Exempt Salaries as California Minimum Wage Increases
California's exempt salary threshold is tied directly to the state's minimum wage.
As California minimum wage increases, exempt salaries must also increase to remain legally compliant.
For 2026, California's minimum wage increased to $16.90 per hour, raising the minimum annual salary required for many exempt employees to over $70,000 per year.
Businesses that fail to adjust salaries accordingly may unknowingly lose the exemption altogether, exposing themselves to years of overtime liability.
"Annual wage audits should be standard practice," Cheng advises. "Waiting until litigation to discover an employee no longer qualified as exempt can become extraordinarily expensive."
3. Improperly Classifying Employees as Outside Salespersons
California applies one of the country's most restrictive outside sales exemptions.
To qualify, employees generally must spend more than half of their working time away from the employer's place of business actively selling products or services or obtaining contracts.
Many employers mistakenly assume sales representatives automatically qualify simply because they carry a sales title.
In litigation, courts often examine:
- Time records
- Calendars
- GPS data
- Expense reports
- Customer visits
- Daily work activities
Without documentation demonstrating sufficient outside sales activity, employers may face substantial exposure for unpaid overtime, missed meal and rest breaks, and related penalties.
"Titles don't win lawsuits," Cheng notes. "Documentation does."
4. Misunderstanding California-Specific Overtime Exemptions
California contains several overtime exemptions that either differ significantly from—or do not exist under—federal law.
For example, certain commissioned employees may qualify for exemption only if strict compensation requirements are satisfied, including:
- Earnings exceeding specified wage thresholds
- More than half of total compensation derived from commissions
- Compliance with California Wage Orders
Employers frequently assume commission-based compensation alone creates an exemption.
It does not.
Because these exemptions require detailed compensation analysis, businesses should periodically review payroll records, commission structures, and classification practices to ensure continued compliance.
Small classification errors can quickly evolve into class actions or PAGA claims involving significant financial exposure.
5. Applying the Wrong Independent Contractor Test
Independent contractor classification remains one of the most misunderstood areas of California employment law.
Although the U.S. Department of Labor continues to evaluate the federal "economic realities" test, California generally applies the much stricter ABC Test established under state law.
To classify a worker as an independent contractor, businesses typically must establish that:
A. The worker is free from the hiring entity's direction and control.
B. The work performed falls outside the company's usual course of business.
C. The worker is independently engaged in an established trade or business.
California recognizes limited statutory exceptions for certain licensed professionals and industries, but those exceptions are highly technical and should be carefully evaluated before relying upon them.
"Independent contractor mistakes often create enormous liability," Cheng explains. "Employers may face back wages, overtime claims, payroll taxes, civil penalties, attorneys' fees, and PAGA exposure—all because of a classification decision made years earlier."
Five Practical Steps California Employers Should Take Today
Businesses operating in California should proactively review their employment practices before disputes arise.
1. Follow California Law First
Do not assume changes in federal regulations automatically apply in California. California law frequently imposes more demanding compliance obligations.
2. Review Compensation Annually
Conduct annual salary reviews to ensure exempt employees continue meeting California's updated salary thresholds.
3. Audit Employee Classifications
Compare written job descriptions against employees' actual daily responsibilities to confirm exempt classifications remain appropriate.
4. Conduct Wage-and-Hour Compliance Reviews
Regularly evaluate:
- Overtime practices
- Meal and rest break compliance
- Payroll procedures
- Commission plans
- Independent contractor relationships
- Recordkeeping systems
Preventive audits are significantly less expensive than defending employment litigation.
5. Consult Experienced Employment Counsel Before Problems Escalate
Early legal guidance can identify compliance gaps before they become lawsuits.
Whether reviewing employee classifications, responding to a demand letter, defending a PAGA claim, or preparing for trial, experienced employment counsel can substantially reduce legal exposure and protect business operations.
A Trial-Focused Employment Law Practice with a Unique Perspective
The Law Offices of Paul P. Cheng offers a unique advantage rarely found among California employment law firms.
Unlike firms that exclusively represent one side of employment disputes, our attorneys represent both employers and employees. This dual perspective provides valuable insight into how both sides evaluate risk, develop litigation strategies, negotiate settlements, and prepare cases for trial.
Led by former prosecutor, mediator, and veteran trial attorney Paul P. Cheng, our employment litigation team handles matters in both California state and federal courts, including:
- Employer compliance counseling
- Wage and hour litigation
- Wrongful termination claims
- Harassment and discrimination defense
- Workplace investigations
- PAGA litigation
- Independent contractor disputes
- Employment contract disputes
- Business litigation
- Trial and appellate advocacy
Because we understand how employment cases are built from both perspectives, we help employers proactively minimize risk while remaining fully prepared to aggressively defend claims when litigation becomes unavoidable.
Contact the Law Offices of Paul P. Cheng
If your business has questions regarding employee classifications, overtime compliance, wage-and-hour practices, independent contractor relationships, or is currently facing an employment dispute, our employment litigation team is ready to help.
Law Offices of Paul P. Cheng
Employment Law • Business Litigation • Trial Attorneys
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Call (626)356-8880 to schedule a confidential consultation and learn how proactive legal counsel can help protect your business before employment disputes become costly litigation.
Disclaimer: This publication is provided for general informational purposes only and does not constitute legal advice or create an attorney-client relationship. Every legal matter is different. Individuals and businesses should consult qualified legal counsel regarding their specific circumstances.