# California Labor Law

## What It Is

California has the most employee-protective labor laws in the United States, governed primarily by the California Labor Code, Industrial Welfare Commission (IWC) Wage Orders, and regulations from the Division of Labor Standards Enforcement (DLSE). These laws apply to any person employed in California, regardless of the employer's size.

## How It Applies to Palace Fund

If Palace Fund hires any employees in California -- even one part-time analyst or operations person -- the full weight of California labor law applies. There is no small-employer exemption for most requirements. The main decision points are:

1. **Employee vs. independent contractor** -- California's ABC test (AB 5) makes it very difficult to classify workers as independent contractors
2. **Exempt vs. non-exempt** -- determines whether overtime and meal/rest break rules apply
3. **At-will employment** -- California is at-will, but with significant exceptions

## Employee vs. Independent Contractor (AB 5 / ABC Test)

Under California's ABC test (Lab. Code 2775), a worker is presumed to be an employee unless the hiring entity proves all three:

- **(A)** The worker is free from the control and direction of the hiring entity
- **(B)** The worker performs work outside the usual course of the hiring entity's business
- **(C)** The worker is customarily engaged in an independently established trade or business of the same nature

For Palace Fund, prong B is the problem: an analyst doing investment research is performing work within the usual course of an investment fund's business. This means most fund workers cannot be classified as independent contractors.

**Exception**: Licensed professionals (lawyers, accountants) and certain business-to-business relationships may qualify under Borello test exemptions. An outsourced accountant or law firm is fine. A person doing day-to-day fund work is an employee.

## Exempt vs. Non-Exempt Classification

If a worker is an employee, the next question is whether they are exempt from overtime and meal/rest break rules.

**To be exempt in California, ALL of the following must be met:**
- Salary basis: paid a fixed salary, not hourly
- Minimum salary: at least 2x California minimum wage for full-time ($66,560/year in 2024, adjusted annually)
- Duties test: must primarily (50%+ of time) perform exempt duties

**Relevant exemptions for a fund:**
- **Administrative exemption**: office/non-manual work directly related to management policies or general business operations, requiring independent judgment
- **Professional exemption**: requires advanced knowledge in a field of science or learning
- **Executive exemption**: manages the enterprise or a department, directs 2+ employees

An investment analyst who exercises independent judgment on portfolio decisions likely qualifies for the administrative exemption. An operations/admin person doing routine tasks likely does not.

## Key Requirements If You Have Employees

### Wage and Hour
- **Minimum wage**: $16.00/hour statewide (2024); some cities are higher (San Francisco $18.67, Los Angeles $17.28)
- **Overtime**: non-exempt employees get 1.5x after 8 hours/day or 40 hours/week; 2x after 12 hours/day
- **Meal breaks**: 30-minute unpaid meal break before the 5th hour; second meal break before the 10th hour
- **Rest breaks**: 10-minute paid rest break per 4 hours worked
- **Pay frequency**: at least semi-monthly for exempt; at least semi-monthly for non-exempt with specific timing rules
- **Pay stubs**: itemized wage statements required every pay period

### Hiring
- **Offer letter**: not legally required but strongly recommended; should state at-will status, salary, exempt/non-exempt classification, and start date
- **Pay transparency**: must include pay scale in job postings (SB 1162)
- **Background checks**: restricted by Ban the Box law (cannot ask about criminal history before conditional offer)
- **I-9 verification**: federal requirement, must verify work authorization within 3 days of hire

### Required Notices and Postings
- Wage theft prevention notice (DLSE form) at time of hire
- Required workplace posters (can be ordered free from DIR)
- Sexual harassment prevention policy
- Written notice of pay rate and pay day

### Leave and Benefits
- **Sick leave**: minimum 5 paid sick days per year (SB 616, effective 2024)
- **Paid family leave**: state-administered through SDI/PFL (employee-funded through payroll tax)
- **CFRA/FMLA**: applies to employers with 5+ employees (CFRA) or 50+ (FMLA); allows 12 weeks unpaid leave for qualifying events
- **Workers' compensation insurance**: required for all employers with 1+ employees; must obtain a policy before the employee starts

### Termination
- **Final pay**: if employer terminates, all wages due immediately; if employee resigns with 72+ hours notice, due on last day
- **WARN Act**: California WARN applies to employers with 75+ employees (not relevant for a small fund)
- **At-will exceptions**: cannot terminate for discriminatory reasons (FEHA), in retaliation for reporting violations, or in violation of public policy

## Payroll Tax Obligations

When you hire an employee, register with:
1. **EDD** (Employment Development Department) -- state payroll taxes (SDI, UI, ETT, PIT withholding)
2. **IRS** -- federal payroll taxes (FICA, FUTA, income tax withholding)

Use a payroll provider (Gusto, Rippling, ADP) to handle withholding, filings, and W-2 issuance. This is not optional complexity -- California payroll penalties are severe.

## Practical Recommendations for Palace Fund

For a fund with 1-2 employees:
- **Use a payroll provider from day one** -- Gusto or Rippling costs $40-80/month and handles tax filings, pay stubs, W-2s, and new hire reporting
- **Classify carefully** -- get the exempt/non-exempt decision right at the start; misclassification triggers back pay, penalties, and attorney's fees
- **Get workers' comp insurance** -- required before the first day of work; available through the payroll provider or State Compensation Insurance Fund
- **Keep it simple** -- offer at-will employment with an offer letter, provide the required notices, post the required posters, and use the payroll provider's onboarding workflow
- **Consider outsourcing first** -- if the work can be done by a third-party firm (accounting firm, legal firm, fund administrator), that avoids employee obligations entirely

## Action Items

1. Decide whether to hire employees or outsource to third-party service providers
2. If hiring: register with EDD and IRS, set up a payroll provider, obtain workers' comp insurance
3. Correctly classify each position as exempt or non-exempt before making an offer
4. Prepare an offer letter template with at-will language, compensation, and classification
5. Complete required notices and postings on or before the first day of work
6. Set up meal/rest break policies for any non-exempt employees