Salary alone does not determine status - the duties test matters most. Misclassification is one of the most expensive mistakes.
California has its own exemption tests that are often stricter than federal law. Simply paying someone a salary does not make them exempt from overtime. You must satisfy both the salary threshold AND the duties test.
The Two-Part Test
- Salary Threshold: Must earn at least 2x the state minimum wage for full-time work
- Duties Test: Must satisfy the duties requirements for the specific exemption claimed
2025-2026 Salary Thresholds
White-Collar Exemptions Overview
IWC Wage Order 4-2001 governs professional, technical, clerical, and mechanical occupations - covering most SaaS employees.
Executive Exemption Duties
- Management of the enterprise or a customarily recognized department
- Customarily and regularly directs work of 2+ employees
- Authority to hire/fire or recommend hiring, firing, advancement, promotion
- Customarily and regularly exercises discretion and independent judgment
Administrative Exemption Duties
- Office or non-manual work directly related to management policies or general business operations
- Customarily and regularly exercises discretion and independent judgment on matters of significance
Common Mistake
Paying someone $80K salary does not automatically make them exempt. A customer support lead making $90K but lacking true independent judgment may still be non-exempt and entitled to overtime.
Consequences of Misclassification
- Back overtime pay (up to 4 years)
- Meal and rest break premium pay
- Waiting time penalties (up to 30 days wages)
- PAGA penalties ($100/employee/pay period)
- Class action exposure
Higher salary threshold ($122K+) and narrow duties test. Most SaaS companies misapply this exemption.
Labor Code Section 515.5 creates a special exemption for computer professionals, but it has a higher salary threshold and very specific duties requirements that ALL must be met.
2026 Computer Professional Thresholds
Duties Test - ALL Must Be Met
- Primarily engaged in intellectual or creative work requiring the exercise of discretion and independent judgment
- Highly skilled and proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming, and software engineering
- Primarily engaged in ONE of the following:
- Systems analysis techniques and procedures
- Design, development, documentation, analysis, creation, testing, or modification of computer systems or programs
- Documentation or creation of computer programs related to design of software or hardware
Who DOES Qualify
- Senior software engineers designing systems
- Systems analysts creating specifications
- Software architects making design decisions
- Principal engineers with discretion over implementation
Who Does NOT Qualify
- Entry-level programmers "learning to become proficient"
- IT help desk/support roles
- QA testers doing routine testing
- Data entry personnel
- Network/hardware technicians
- Website content creators (non-software)
SaaS Role Examples
Likely Exempt: Staff Engineer ($180K) who designs distributed systems architecture and makes independent technical decisions about implementation approaches.
Likely NOT Exempt: Junior Developer ($95K) who implements features from detailed specifications, follows established code patterns, and has code reviewed by senior engineers before merge.
The "Software Engineer" Title Trap
Job title is irrelevant. A "Software Engineer" earning $100K does not meet the salary threshold. A "Senior Developer" who follows detailed specifications without independent judgment fails the duties test regardless of salary.
California requires DAILY overtime, not just weekly. This catches most out-of-state employers.
Labor Code Section 510 establishes California's overtime requirements, which differ significantly from federal law (FLSA).
California Overtime Rules
Overtime Rates
7th Consecutive Day Rules
- First 8 hours on 7th consecutive day: 1.5x regular rate
- Over 8 hours on 7th consecutive day: 2x regular rate
Out-of-State Employer Trap
Federal law only requires overtime after 40 hours/week. An employee working four 10-hour days (40 hours total) would receive 8 hours of overtime under California law, but zero under federal law.
Calculation Example
Scenario: Non-exempt employee works 9 hours Monday, 10 hours Tuesday, 8 hours Wed-Fri.
Federal calculation: 45 total hours = 5 hours OT at 1.5x
California calculation:
- Monday: 1 hour at 1.5x (over 8)
- Tuesday: 2 hours at 1.5x (over 8)
- Weekly: 5 additional hours at 1.5x (over 40)
- Total: 8 hours of overtime
Why This Catches Out-of-State Employers
- Your payroll system may be configured for federal rules only
- "Flexible schedules" that allow 4x10 days trigger daily OT
- Remote workers logging long days during crunch periods
- Startup culture of "get it done" without time tracking
Alternative Workweek Schedules
California allows alternative workweek schedules (like 4x10) without daily overtime, but ONLY with a proper election process. This requires a secret ballot election with 2/3 employee approval, specific notice periods, and DLSE filing. Most startups do not have valid alternative workweek schedules in place.
Same rules apply to remote workers. Responding to Slack during lunch = violation with premium pay.
Meal Period Requirements
Labor Code Section 512 - Meal periods
- Shifts over 5 hours: 30-minute meal period before end of 5th hour
- Shifts over 10 hours: Second 30-minute meal period before end of 10th hour
- Employee must be relieved of ALL duties
- Employee must be free to leave premises (or work area for remote workers)
Rest Period Requirements
Labor Code Section 226.7 - Rest periods and premium pay
- 10-minute paid rest per 4 hours worked (or major fraction thereof)
- Must be in middle of work period "insofar as practicable"
- Less than 3.5 hours: No rest required
Rest Break Schedule
Remote Work Violations
Slack-during-lunch = violation. If a non-exempt remote employee responds to Slack messages, checks email, or attends a "quick call" during their meal period, the meal period is invalid. The employee is owed 1 hour of premium pay.
Meal Period Waivers
- First meal waiver: If shift is 6 hours or less, meal period can be waived by mutual consent
- Second meal waiver: If shift is 12 hours or less AND first meal taken, second can be waived
- Waivers should be documented in writing
- Employee can revoke waiver at any time
Premium Pay for Violations
Labor Code Section 226.7
Premium Pay Rates
Remote Worker Best Practices
Create a clear policy that non-exempt remote workers must take meal breaks away from their computer, must not respond to work communications during meals, and should use calendar blocks or status indicators to signal break times.
"Suffered or permitted" work is compensable. You must have systems to track and prevent off-the-clock work.
Labor Code Section 1174 - Record requirements
The "Suffered or Permitted" Rule
Under California law, if an employer knows or should have known that an employee is working, that time is compensable - even if the employer did not request or authorize the work.
Remote Work Reality
If your non-exempt remote employee sends Slack messages at 9pm, checks email before starting their shift, or works through lunch - you likely "knew or should have known" from system logs. That time is compensable.
Record Retention Requirements
- Payroll records: 3 years
- Time records: 3 years
- Records must include: hours worked each day, meal periods, total hours per week
Required Timekeeping Systems & Policies
- Time tracking system (can be software-based)
- Clear policy requiring employees to record all time worked
- Policy prohibiting off-the-clock work
- Meal break attestation system
- Manager review and approval process
- Written acknowledgment of timekeeping policy
Preventing Off-the-Clock Work
- Clear written policy: Employees must not work outside scheduled hours without prior approval
- System controls: Consider limiting access to work systems outside scheduled hours
- Manager training: Managers must not assign or accept work outside hours
- Reporting mechanism: Easy way for employees to report if they worked extra time
- Regular audits: Compare system access logs with reported time
What Counts as Work
All of the following are compensable time for non-exempt employees:
- Reading and responding to work email or Slack
- Attending meetings (including "optional" ones)
- Required training, even if online
- Waiting to be engaged (on-call while restricted)
- Travel between work sites during the day
10 required items on every pay stub. Missing items = $50-$100 penalties per pay period, up to $4,000.
Labor Code Section 226 - Itemized wage statements
Required Items (All 10)
Every wage statement must include:
- Gross wages earned
- Total hours worked (non-exempt employees)
- Piece rate units and rate (if applicable)
- All deductions
- Net wages earned
- Pay period dates (inclusive dates of the period)
- Employee name and last 4 of SSN (or employee ID number)
- Employer name and address
- Hourly rates and hours at each rate
- Overtime rates and hours at each overtime rate (if applicable)
Penalties for Violations
Common Deficiencies
Many payroll systems used by out-of-state companies do not include all required information. Missing: pay period dates, employer address, or hours worked at each rate are frequent issues. Review your pay stubs now.
Special Rules for Different Pay Types
- Multiple hourly rates: Must show hours and rate for each
- Commission: Must show how commission was calculated
- Piece rate: Must show units and rate per unit
- Bonuses: Must show separate from regular wages
Payroll Provider Check
If you use an out-of-state payroll provider, ask them to confirm your California employee pay stubs include all 10 required items. Request a sample California-specific pay stub template.
You personally may be liable for wage violations. Corporate structure does not fully protect you.
Labor Code Section 558.1 - Personal liability for wage violations
Who Is Personally Liable?
"Natural persons" who act as employers can be held personally liable. This includes:
- Owners (including startup founders)
- Directors
- Officers (CEO, CFO, COO, etc.)
- Managing agents (anyone with substantial control over working conditions)
What Violations Trigger Personal Liability?
- Minimum wage violations
- Overtime violations
- Meal period premium pay violations
- Rest period premium pay violations
Why SaaS Founders Should Care
If you make decisions about employee classification, set wage policies, or manage payroll - you may be personally liable for violations. This liability survives even if the company goes bankrupt or dissolves. Incorporating as a Delaware C-Corp does not shield you from California wage law personal liability.
Standard of Liability
To be held personally liable, you must have:
- Caused the violation by action or omission, AND
- Known or should have known that your action or omission would cause the violation
Founder Liability Scenario
Situation: CEO decides to classify all engineers as exempt to avoid overtime paperwork. HR implements this. Company later faces wage claims.
Result: CEO is personally liable because they caused the classification decision and should have known it would cause violations. The company's Delaware incorporation provides no protection.
Protective Measures
- Document that you sought and followed legal advice on classification
- Use written policies and train managers
- Conduct regular classification audits
- Maintain Employment Practices Liability Insurance (EPLI)
- Address compliance issues promptly when discovered
The "I Didn't Know" Defense
Ignorance is not a defense if you "should have known." As a founder hiring California employees, you are expected to understand California's wage-hour requirements. This resource hub exists because the duty to know is on you.