California 2026 Year in Review

As 2026 comes to a close, California employers face a mix of new laws, court decisions, and agency developments that will affect workplace policies, employment agreements, and day-to-day compliance in 2027.

Key developments include:

• Further minimum wage increases at the state and local levels
• New laws and court decisions affecting the enforceability of arbitration agreements
• A delayed effective date and new exceptions for California’s “stay-or-pay” law
• Higher pay data reporting penalties and new Labor Commissioner enforcement tools
• Expanded paid family leave and bereavement leave coverage for “designated persons”
• New training and workplace surveillance requirements, and a clarified definition of “sex discrimination”
• New rules governing artificial intelligence and automated decision systems in the workplace

Employers with operations or employees in California should review the developments below as they plan for the year ahead.

In addition to the breakdown below, join us for our 37^th annual Labor & Employment Seminar Series, where we will provide practical guidance on these changes on November 3, 2026. You can register for this and many more seminars here.

State Minimum Wage and Exempt Salary Threshold

Effective January 1, 2027, California’s statewide minimum wage will increase to $17.40 per hour. The exempt salary threshold will correspondingly increase to $72,384 per year. Employers should confirm that exempt employees’ salaries meet the new threshold and update their workplace postings.

Local Minimum Wage Increases

Effective July 1, 2026, numerous localities increased their minimum wage rates above the state minimum, including Alameda ($17.76), Berkeley ($19.61), Emeryville ($20.34), Fremont ($18.05), the City of Los Angeles ($18.42), unincorporated Los Angeles County ($18.47), Malibu ($17.91), Milpitas ($18.50), Pasadena ($18.57), San Francisco ($19.61), and Santa Monica ($18.47).

Several localities also imposed higher minimum wages for the hospitality industry. As of July 1, 2026, Santa Monica’s minimum wage for hotels and businesses operating on hotel property increased to $25.00 per hour, and West Hollywood’s minimum wage for hotel employees increased to $20.87 per hour. In the City of Los Angeles, hotel employers must provide a health benefit rate of $8.15 per hour for non-managerial, non-supervisory, and non-confidential hotel workers and their dependents, which must be paid as additional hourly wages if health benefits are not provided. Employers with employees in multiple jurisdictions should confirm they are applying the correct rate for each work location.

“Stay-or-Pay” Law Amended

Last year, California enacted AB 692, which invalidated most exit penalties and training repayment agreements, commonly known as “stay-or-pay” provisions. This year, Governor Newsom signed AB 1697, which amends the law in several important respects:

• Effective September 30, 2026, the law delays the application of AB 692 until January 1, 2027.
• The exception for discretionary or unearned bonus payments is no longer limited to payments made “at the outset of employment,” if the remaining statutory requirements are met.
• A few new exceptions have been added, each with its own statutory requirements:
  • Employers may seek repayment of recruitment or retention bonuses under a government-funded program.
  • Securities broker-dealers, insurance producers, investment advisers, and their affiliates may enter into certain signing and retention bonus arrangements with repayment provisions with agents or representatives who are registered with the SEC or FINRA, or licensed under applicable California law.
  • Employers are now allowed to recoup up to 40 hours of paid time off (“PTO”) advanced to an employee before the employee actually accrued the PTO.

Employers should review their retention bonus, sign-on bonus, PTO advance, tuition, and training repayment arrangements before January 1, 2027.

Pay Data Reporting Penalties

As a reminder, California employers with 100 or more employees, or 100 or more workers hired through labor contractors, must submit annual pay data reports to the Civil Rights Department by the second Wednesday in May. SB 1237 makes noncompliance more costly by increasing the penalty for subsequent failures to file to up to $1,000 per employee, five times the prior $200 penalty.

Additional Enforcement Tools in Labor Commissioner Investigations

Building on last year’s unpaid-wage-judgment collection measures (SB 261),SB 1316 strengthens the Labor Commissioner’s enforcement powers by allowing wage judgment liens on an employer’s real property to be renewed for additional 10-year periods. The law also expands evidentiary consequences when employers, contractors, or subcontractors fail to timely produce requested payroll, time, and employment records to the Labor Commissioner. Employers should treat document requests from the Labor Commissioner issued pursuant to its broad investigatory and subpoena powers under existing law as litigation-critical deadlines, because covered records that are not timely produced may be excluded or unavailable for use in later administrative or writ proceedings, subject to limited exceptions.

Arbitration agreements remained an active area this year, with new legislation and several appellate decisions underscoring that the enforceability of an arbitration program depends heavily on how the agreement, and any related agreements, are drafted. Employers that have not reviewed their arbitration agreements recently should consider doing so now.

Alignment with the Federal Arbitration Act

Effective January 1, 2027, AB 2155 amends the California Arbitration Act to provide that a written arbitration agreement is not enforceable under California law to the extent the agreement is not enforceable under the Federal Arbitration Act (FAA). The law closes two gaps that allowed employers to rely on the California Arbitration Act to compel arbitration of claims that federal law had placed beyond the reach of pre-dispute arbitration, namely covered sexual assault and sexual harassment claims and claims excluded by the transportation worker exemption.

The Court of Appeal’s June 25, 2026, decision in Betanco v. Living Spaces Furniture, LLC[1] illustrates how broadly the transportation worker exemption can reach. The court held that a delivery driver was exempt from the FAA and could not be compelled to arbitrate because he was engaged in a single, unbroken stream of interstate transportation of goods, even though he made retail, rather than wholesale, deliveries that never crossed state lines. The court also refused to dismiss his non-individual PAGA claims, explaining that the fact that other aggrieved employees had signed arbitration agreements did not affect his standing to pursue those claims. Employers with drivers or other workers involved in moving goods, including last-mile delivery, should not assume the FAA will govern their arbitration agreements.

Bereavement Leave for a “Designated Person”

SB 1149 allows an employee to identify a “designated person” whose death qualifies the employee for bereavement leave, and permits employers to limit an employee to one designated person per 12-month period. Employers should update their bereavement leave policies accordingly.

Paid Family Leave Benefits

SB 590 expands Paid Family Leave (PFL) benefits, beginning July 1, 2028, to employees caring for a seriously ill designated person, and AB 2054 expands PFL coverage related to a family member’s covered active military duty. PFL is a wage replacement benefit funded by employee contributions, not a job-protected leave entitlement; job protection depends on whether the absence qualifies under a separate law such as the California Family Rights Act (CFRA). AB 2054 becomes operative when the specified EDDNext claims-management provision is incorporated into EDD’s integrated claims management system or July 1, 2028, whichever occurs sooner. Because PFL is managed by EDD, employers simply need to be prepared to provide the updated PFL brochure when available to employees requesting leave that may qualify for PFL.

Construction Apprenticeship Grant Program

AB 1980 requires the Department of Industrial Relations, through the Division of Apprenticeship Standards and upon appropriation, to establish the Equal Representation in Construction Apprenticeships Grant Program to expand access to building and construction career pathways for women, nonbinary individuals, and underrepresented populations.

Anti-Hate Speech Training

AB 1803 requires employers with five or more employees to include anti-hate speech content in required sexual harassment prevention training beginning January 1, 2028. The training must provide practical guidance on recognizing, reporting, and confronting workplace speech that vilifies, humiliates, or incites hatred against people based on protected characteristics under the Fair Employment and Housing Act. A training that already includes information about unlawful harassment and prevention of abusive conduct based on protected characteristics satisfies the requirement. Employers relying on standard training modules, including training provided by the Civil Rights Department, should nevertheless confirm such training covers the new content.

Naloxone Training

AB 2150 requires employers that require employees to complete CPR certification training to also require those employees to complete a separate online video training on naloxone approved by the Emergency Medical Services Authority. The training must cover recognizing signs and symptoms of an opioid overdose, appropriate emergency response, and proper administration of naloxone or another FDA-approved opioid antagonist. Because a violation is a crime, covered employers should update training requirements and document compliant naloxone training.

Immigration-Related Protections

AB 2495 expands protections against unlawful immigration-related practices by prohibiting conduct related to a person’s perceived immigration status that would reasonably tend to deter the exercise of workplace rights or induce conduct the person has a legal right to avoid. The law builds on protections California has enacted in recent years, including the Immigrant Worker Protection Act, which took effect in 2018 and limits employer cooperation with workplace immigration enforcement. Employers should consider whether their anti-retaliation and immigration-related practices policies need to be updated.

Clarified Scope of Sex Discrimination

AB 2563 standardizes California’s definition of sex discrimination across state law. Most importantly for employers complying with the Fair Employment and Housing Act, the law further defines “sex” to include any of the following actual or perceived characteristics or actions: assigned sex or gender category, degree of conformity with sex or gender stereotypes, gender (including gender identity and expression, and access to or use of gender-affirming care or other related health care), pregnancy and related medical conditions, reproductive-health decision-making, sexual orientation, and variations in sex characteristics (including intersex traits or differences in sex development). Employers should review equal employment opportunity, anti-harassment, anti-discrimination, investigation, and training materials to ensure that their policies and examples capture the updated definition.  

California enacted several new laws on AI, automated technology, and workplace surveillance:

• SB 947, beginning July 1, 2027, restricts employer use of automated decision systems (ADS) in employment under a separate Labor Code framework, building on California’s existing anti-discrimination regulation of ADS use under the FEHA regulations. The law prohibits using an ADS to prevent compliance with labor, occupational health and safety, employment, or civil rights laws; infer an employee’s protected status; or predict and take adverse action against a worker for exercising legal rights. It also prohibits employers from relying solely on an ADS for disciplinary or termination decisions and imposes notice and human-review requirements when an employer primarily relies on ADS output.
• SB 951 requires Cal-WARN notices for mass layoffs, relocations, or terminations caused in whole or substantial part by AI or other automated technology to include the number, classification or occupation, and work location of affected layoffs; the job functions that will be automated; the category or type of technology; and the statement, “This notice is for a technology displacement.”

• AB 1331 limits the use of workplace surveillance tools in bathrooms located in the workplace and allows employees to leave behind workplace surveillance tools when entering a bathroom, subject to specified exceptions. Employers should review tracking devices, badges, phones, timekeeping applications, and other monitoring tools for bathroom-related data collection.
• AB 1883 prohibits employers from using AI-enabled workplace surveillance tools to recognize or infer an individual’s emotional state or collect neural data, subject to specified exceptions.

Employers using, or considering, AI tools in hiring, management, monitoring, or workforce planning should evaluate those tools against these new requirements.

Employers should review their policies, agreements, and practices ahead of 2027, particularly arbitration and related employment agreements, stay-or-pay and bonus arrangements, leave policies and handbooks, EEO and harassment prevention policies and training, responses to Labor Commissioner records requests, workplace surveillance, and any use of AI or automated decision systems. Please reach out to your Michael Best attorney to discuss how these developments may affect your organization.

Join us for our 37^th annual Labor & Employment Seminar Series, where we will provide practical guidance on these changes on November 3, 2026. You can register for this and many more seminars here.

[1] Betanco v. Living Spaces Furniture, LLC, 121 Cal. App. 5th 411 (2026).