Exploring the Intersection of California Business and Employment Law

For business lawyers in California, employment law is no longer a siloed area best left to HR or outside counsel. Increasingly, issues at the intersection of business operations and workplace regulation demand proactive legal guidance, deep familiarity with California-specific employment statutes, and a strategic understanding of business risk.

From worker classification and compensation structuring to arbitration agreements and internal investigations, employment-related considerations are baked into nearly every phase of a company’s lifecycle. Failing to spot and manage these risks early can lead to litigation, reputational harm, and regulatory scrutiny.bThis article outlines key areas where California business and employment law intersect—and why business counsel must stay ahead of the curve to effectively advise and protect their clients.

Business Formation and Worker Classification

One of the earliest—and most consequential—decisions a business makes is how to classify its workforce. For California companies, especially startups and gig economy businesses, worker classification is a legal minefield.

The state’s adoption of the “ABC Test” under AB 5 (codified at Labor Code §2775 et seq.) makes it significantly harder to classify workers as independent contractors. Unless all three prongs of the test are met—including that the worker performs work outside the usual course of the hiring entity’s business—they’re presumed to be employees.

Business lawyers should work closely with clients to:

• – Assess the roles of all contractors at formation and during scale-up.
• – Evaluate ongoing relationships for risk of misclassification.
• – Structure contracts and working relationships accordingly.
• – Consider exemptions and carve-outs under California law.

Misclassification can lead to liability for unpaid wages, taxes, and penalties. It can also create investor red flags and delay acquisitions or funding rounds.

Employment Policies and Corporate Governance

A company’s employment policies don’t just govern the workplace—they can have direct implications for governance, compliance, and risk management.

In-house and outside corporate counsel should review:

• Employee handbooks and codes of conduct, especially for compliance with wage and hour laws, anti-discrimination statutes, and whistleblower protections.
• Policies governing equity compensation, remote work, social media use, and trade secret protection.
• Onboarding and offboarding processes, including offer letters, arbitration agreements, and exit interviews.

California’s evolving laws around non-disparagement clauses, pay transparency, and non-compete agreements (increasingly disfavored under California Business and Professions Code §16600 and reinforced by SB 699) require updated language and careful coordination with HR and executive teams.

Executive Compensation and Employment Agreements

Executive employment agreements are a hybrid of business law, tax law, and employment law. These agreements must balance competitive compensation structures with enforceable protections for the business.

California attorneys advising on executive contracts should consider:

• Severance and change-in-control provisions, which may be scrutinized in M&A contexts.
• Restrictive covenants, which must comply with California’s strict limitations.
• Section 409A compliance, to avoid IRS penalties on deferred compensation arrangements.
• Dispute resolution mechanisms, including compliance with the California Arbitration Act and recent case law affecting arbitration enforceability.

The negotiation and enforcement of these contracts frequently surface in shareholder disputes and litigation—making upfront precision a necessity.

Equity Compensation and Labor Code Compliance

Many California companies, particularly in tech and biotech, use stock options or RSUs to attract talent. But even equity compensation must comply with California labor law.

Key compliance areas include:

• Minimum wage laws – Even employees compensated largely in equity must receive at least minimum wage for all hours worked.
• Wage statement accuracy – Stock options must be clearly disclosed if considered part of compensation.
• Vesting and termination rules – Failing to clearly address post-termination equity treatment can spark disputes.

Lawyers must also evaluate how equity incentives are presented and documented in offer letters, employment agreements, and board resolutions.

Employment Litigation Risk and Corporate Disclosures

Employment-related claims—wrongful termination, harassment, wage and hour violations—often intersect with corporate risk disclosures, particularly for public or pre-IPO companies.

Business lawyers should ensure:

• Employment practices liability (EPL) insurance is in place and reviewed annually.
• Board-level oversight exists for significant employee-related risks.
• Risk disclosures in SEC filings or investor materials appropriately reflect labor litigation or compliance issues.

In the current climate of social accountability and DEI scrutiny, even reputational fallout from employee complaints can trigger stakeholder activism or investor pullback.

M&A and Workforce Integration

Employment issues are front and center in corporate transactions. Whether in asset purchases, mergers, or stock acquisitions, business lawyers must account for employment liabilities and obligations.

Key diligence areas include:

• Wage and hour compliance, particularly under California’s strict standards on meal and rest breaks, timekeeping, and overtime.
• Open claims or agency investigations, including pending matters before the Labor Commissioner or DFEH.
• Union status and collective bargaining obligations, if applicable.
• Change in control triggers in executive contracts or equity plans.

Post-closing, employment integration issues—from aligning compensation and benefits to handling redundancies—must be addressed with sensitivity and legal precision.

Workplace Investigations and Whistleblower Protections

Internal investigations into workplace misconduct, retaliation, or compliance breaches are now routine in corporate governance—and business lawyers are often tasked with leading or supervising these inquiries.

California-specific challenges include:

• Whistleblower protections under Labor Code §§1102.5 and 98.6, which offer robust retaliation safeguards.
• Employee privacy rights, especially concerning digital surveillance, drug testing, or off-duty conduct.
• Attorney-client privilege limits, especially when outside counsel is not used for independent investigations.

Poorly handled investigations can worsen exposure and create future claims—underscoring the importance of coordination between legal, HR, and compliance teams.

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