Category: Business & Contract Law

A Temecula framing sub has $180,000 out on a tract in Menifee, the Riverside GC has gone quiet, and the drywall crew is behind too. The first question is always whether the sub can reach the GC’s owner personally. In Australia it could: a director who keeps trading while insolvent can be ordered to pay.

California has no such statute. A contractor here can bid and buy lumber all the way down and the owner still owes nothing personally, unless he crossed one of a short list of lines. Protection comes instead from the Civil Code lien and stop notice machinery, the licensing statutes, and a few trust fund rules.

What does California require of a contractor’s owners when the company is insolvent?

Nothing like insolvent trading. In Berg & Berg Enterprises, LLC v. Boyle, 178 Cal.App.4th 1020 (2009), the Sixth District held there is “no fiduciary duty … owed to creditors by directors of a corporation solely by virtue of its operating in the ‘zone’ or ‘vicinity’ of insolvency,” and refused a broad duty even at actual insolvency. What survives is a trust fund duty against “actions that divert, dissipate, or unduly risk corporate assets.” A rule against looting, not against optimism.

The live claim is a distribution. Corporations Code § 500 bars a distribution unless retained earnings or an asset test cover it, and section 501 bars one if the company would then be “likely to be unable to meet its liabilities … as they mature.” Section 316 makes approving directors liable for the amount plus interest. Most Inland Empire contractors are LLCs, where Corp. Code § 17704.05 does the same work and section 17704.06 makes consenting managers liable for four years. An owner who takes a draw on the way down creates the claim a trustee is hired to find.

Where does a failing contractor-owner face personal exposure?

Licensing first. Bus. & Prof. Code § 7108 makes “[d]iversion of funds … received for … completion of a specific construction project” a cause for discipline. Penal Code § 484b goes further, reaching anyone who takes money for an improvement, willfully fails to finish it, and diverts the funds; above $2,350 that means a fine up to $10,000 or jail.

Prompt payment next. Section 7108.5 requires payment down the chain within seven days of a progress payment, penalizes delay at 2 percent per month plus fees, and caps withholding at 150 percent of a dispute. Civ. Code § 8800 gives the direct contractor the same penalty against a slow owner, and section 8814 passes retention down within 10 days.

The exposure that follows a person home is tax. 26 U.S.C. § 6672 penalizes anyone required to collect and pay over withheld tax who willfully fails to; Unemp. Ins. Code § 1735 does the same for EDD. Add the CSLB bond, $25,000 since January 2023 under SB 607, and section 7068.1, which puts supervision on the qualifier. California has no statutory construction trust fund for private works like New York’s Lien Law article 3-A, which is why the lien and stop notice carry the weight here.

What clocks run the day a general contractor stops paying?

Start with the document subs treat as paperwork. Civil Code § 8200 requires preliminary notice to the owner, direct contractor, and lender before any lien, stop notice, or bond claim, calling it “a necessary prerequisite to the validity of a lien claim or stop payment notice.” Section 8204 sets 20 days after first furnishing. A late notice is not fatal, just expensive: it reaches only the 20 days before service.

Recording splits by tier: a direct contractor records before the earlier of 90 days after completion or 60 after a notice of completion (§ 8412); subs and suppliers get 90 days or 30 days after that notice (§ 8414). The 30-day figure is the trap: an owner can cut the window to a month and nobody tells the sub. Then section 8460 requires suit within 90 days of recording or the lien “expires.”

The stop payment notice reaches cash, not dirt. It is valid only with preliminary notice and only if given before that same deadline (§ 8508), after which section 8522 makes the owner withhold enough to cover it; a bonded notice under section 8532 binds the lender too, and suit must wait 10 days after the notice is given and be filed within 90 days after the notice period closes (§ 8550). On public works a bond replaces the lien (§ 9550, § 9558). Ask for joint checks, and check your license: Bus. & Prof. Code § 7031 bars an unlicensed contractor from suing.

Does the general contractor’s bankruptcy wipe out lien and stop notice rights?

It stops a lot, but not the part that matters. The stay under 11 U.S.C. § 362(a) halts collection, yet section 362(b)(3) excepts “any act to perfect … an interest in property” subject to section 546(b). California liens qualify because they relate back under Civ. Code § 8450 to when work commenced, so the lien can be recorded post-petition.

Enforcement is where claimants lose. In re Baldwin Builders, 232 B.R. 406 (9th Cir. BAP 1999), held that commencing foreclosure “is not an element of ‘perfection’ exempted from section 362’s stay by section 546(b); rather, it is ‘enforcement’ which remains stayed.” Against a debtor landowner the claimant gives notice under section 546(b)(2) instead. On a tract job, though, the debtor is usually the GC, and a solvent owner’s land is not estate property, nor are stop notice funds.

Two exposures cut the other way. Payments received in the 90 days before filing are preferences under section 547(b), answered with ordinary course under section 547(c)(2) and new value under 547(c)(4); see our page on preference clawback defense. If the GC reorganizes, file a proof of claim by the bar date and assert the lien as secured, since 11 U.S.C. § 1191 lets a debtor confirm over objection.

How does the calendar run for a Temecula framing sub?

All dates and figures are illustrative. The sub first furnishes labor on March 2, 2026 and serves preliminary notice on March 18, inside the 20 days section 8204 allows. In October the GC stops paying, leaving $180,000 open. On November 10 the owner records a notice of completion, setting the lien deadline at December 10 under section 8414, not the 90 days the sub assumed.

The GC files Chapter 7 on December 3. The sub records its $180,000 lien on December 8, which section 362(b)(3) permits, and serves a stop payment notice the same day, inside the section 8508 window. The owner still holds about $240,000 and must withhold against the claim. Foreclosure is due March 8, 2027, the stop notice action on March 10.

Now delete one document. Without the March 18 notice, section 8200 makes both the lien and the stop notice invalid, and an October notice would have reached only the prior 20 days of work. The sub holds an unsecured claim: at an illustrative 4 percent distribution, $180,000 becomes $7,200.

What early signs say a California general contractor is sliding?

The behavioral tells are familiar: pay drifting from net 30 to net 60, sudden disputes over change orders approved verbally months ago, releases demanded for partial payment. Each has a public record. The CSLB license lookup shows status, bond condition, and section 7108 discipline. Recorder searches in Riverside, San Bernardino, or Sacramento show liens on the GC’s other jobs and notices of completion starting 30-day clocks on yours. EDD liens show whether payroll taxes are behind.

If your leverage gets you financials, ask for the job cost report and the receivable aging, then go to “billings in excess of costs and estimated earnings,” the overbilling line carried as a liability under percentage-of-completion. Some is normal; a large and growing figure is the signature of borrowing from the next job, months ahead of a filing.

Frequently Asked Questions

Can a California contractor’s owner be personally liable for the company’s unpaid subs?

Usually not. California has no insolvent trading statute, and Berg & Berg Enterprises, LLC v. Boyle, 178 Cal.App.4th 1020 (2009), holds that directors owe creditors no fiduciary duty for operating in the zone of insolvency. The narrow exceptions are diverting assets for insider benefit once actually insolvent, approving a distribution barred by Corporations Code sections 500 or 501, and unpaid payroll trust fund taxes under 26 U.S.C. section 6672.

Do I lose my lien rights if the general contractor files bankruptcy?

No. Section 362(b)(3) with section 546(b) lets a claimant record a California mechanics lien after the petition, because it relates back to commencement of the work under Civil Code section 8450. Enforcement is different: In re Baldwin Builders, 232 B.R. 406 (9th Cir. BAP 1999), holds that commencing a foreclosure action is enforcement, not perfection, and remains stayed.

What is the deadline to record a mechanics lien in California?

A subcontractor or supplier records after it ceases providing work and before the earlier of 90 days after completion or 30 days after the owner records a notice of completion (Civil Code section 8414). A direct contractor gets 90 days after completion or 60 after that notice (section 8412), and section 8460 then requires suit within 90 days.

What is a stop payment notice?

It reaches money, not real property. Under Civil Code section 8522 an owner who receives one must withhold enough of what is due the direct contractor to cover the claim, and a bonded notice under section 8532 binds a construction lender too. It is valid only with preliminary notice and only if served before your lien deadline.

Can I sue for late payment penalties on a California construction job?

Yes. Business and Professions Code section 7108.5 requires a prime or subcontractor to pay down the chain within seven days of a progress payment and imposes 2 percent per month plus attorney fees. Civil Code section 8800 gives the direct contractor the same penalty against a slow owner.

Is diverting construction funds a crime in California?

It can be. Penal Code section 484b reaches a person who receives money for a construction improvement, willfully fails to complete it or pay for labor and materials, and wrongfully diverts the funds. Above $2,350 it carries a fine up to $10,000 or jail. Business and Professions Code section 7108 separately makes it a ground for license discipline.

How North Star Law Firm Can Help

North Star Law Firm works both sides of a construction payment failure for Inland Empire and Sacramento clients: preserving lien and stop notice rights for subs and suppliers, defending owners against liability and preference clawback demands, weighing whether a struggling contractor belongs in Subchapter V or Chapter 7, and tightening payment terms in subcontracts. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Bankruptcy Court for the Central District of California, so the lien calendar and the numbers are read together.

If a general contractor has stopped paying you, or your own company is out of room, contact North Star Law Firm or schedule a consultation.

A Fontana carrier asked a fair question this summer: if his drivers kept winning the argument that the Federal Arbitration Act does not reach them, why could he still push their wage claims into arbitration? The answer was California’s own arbitration statute, and on January 1, 2027 it stops working.

Assembly Bill 2155, Chapter 46 of the Statutes of 2026, signed June 30, 2026, adds a subdivision to Cal. Code Civ. Proc. § 1281: a written arbitration agreement “is not enforceable under this section to the extent the agreement is not enforceable under the Federal Arbitration Act.” One sentence, and the employer’s second try is gone.

That lands harder in the Inland Empire than anywhere else, because so much of the payroll here belongs to people who unload, stage, and drive goods that started somewhere else. Below: who is affected, and what to fix.

What exactly does AB 2155 change about California arbitration law?

Section 1281 has long said that a written arbitration agreement is “valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.” AB 2155 hangs a ceiling over it: state enforceability now runs no further than federal. The Legislature’s stated policy is that “all persons have the full benefit of the rights, forums, and procedures established under state law,” and it imported the FAA’s exclusions as a group.

Two get named. The carve-out in 9 U.S.C. § 1 says the FAA does not reach “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The other is the federal Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, which California courts already applied as federal law, so the weight of this bill sits on the first. Note too that section 1281 is general, which puts commercial clauses in reach.

Why did the California Arbitration Act rescue employers when the FAA did not?

Because the two statutes are independent. Showing that the federal act does not govern your contract is not the same as showing the agreement is unenforceable, and California had a statute of its own. Garrido v. Air Liquide Industrial U.S. LP, 241 Cal.App.4th 833 (2015), held that “[b]ecause Garrido was a transportation worker, the FAA does not apply to the ADR agreement,” then analyzed it under the CAA.

Muller v. Roy Miller Freight Lines, LLC, 34 Cal.App.5th 1056 (2019), ran the same sequence for a driver whose cargo was nearly all out-of-state: exempt from the FAA, unpaid wage claim left in court by Labor Code section 229, other causes of action sent to arbitration anyway. That last clause is the point of AB 2155: what was an inconvenience becomes a defeat.

Which workers actually fall inside the transportation worker exclusion?

Three Supreme Court cases set the outer edges. New Prime Inc. v. Oliveira, 586 U.S. 105 (2019), read “contract of employment” in its 1925 sense, so contractor agreements are inside the exclusion. Bissonnette v. LePage Bakeries Park St., LLC, 601 U.S. 246 (2024), held the worker need not be in the transportation industry at all. Southwest Airlines Co. v. Saxon, 596 U.S. 450 (2022), exempted ramp supervisors who loaded cargo: loading a vehicle bound across state lines is itself commerce.

The Ninth Circuit went further. Rittmann v. Amazon.com, Inc., 971 F.3d 904 (9th Cir. 2020), covered last-mile drivers who never cross a state line, and Carmona v. Domino’s Pizza, LLC, 21 F.4th 627 (9th Cir. 2021), reaffirmed at 73 F.4th 1135 (9th Cir. 2023), reached drivers hauling goods from a California supply center to franchise stores. Then Ortiz v. Randstad Inhouse Services, LLC, 95 F.4th 1152 (9th Cir. 2024), exempted a forklift operator in a California warehouse, since “[a]n employee is not categorically excluded from the transportation worker exemption simply because he performs his duties on a purely local basis.”

What happens to an exempt worker’s claims once arbitration is unavailable?

They go to court. Labor Code § 229 says actions to collect due and unpaid wages “may be maintained without regard to the existence of any private agreement to arbitrate.” That provision is preempted wherever the FAA governs, so it is live again for an exempt driver. Read it narrowly: Lane v. Francis Capital Management LLC, 224 Cal.App.4th 676 (2014), confines section 229 to wage collection claims.

A class waiver lives inside the arbitration agreement and falls with it, and class waivers are durable here only because AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), is a preemption holding, so taking the FAA out takes the shield, as Garrido showed. Representative claims were already court-bound under Adolph v. Uber Technologies, Inc., 14 Cal.5th 1104 (2023), and now everything sits before one jury.

Why won’t the FAA preempt AB 2155 the way it preempted AB 51?

Labor Code section 432.6 (AB 51) made it unlawful to require an arbitration agreement as a condition of employment, and the Ninth Circuit struck it down in Chamber of Commerce v. Bonta, 62 F.4th 473 (9th Cir. 2023): “[s]tate rules that burden the formation of arbitration agreements stand as an obstacle to the FAA.”

AB 2155 sits on the other side of that line: it penalizes nobody for asking an employee to sign. It says only that California will not enforce an agreement Congress placed outside the FAA, and obstacle preemption is hard to build on a statute that does not apply. No court has construed the new subdivision yet.

How should an Inland Empire logistics company rewrite its agreements before 2027?

Audit by function, not job title. After Bissonnette and Ortiz the question is what a class of workers does with goods still in transit. Hostlers, dock loaders, pickers pulling imported freight, and drivers go in the exposed column; maintenance techs, dispatchers, and office staff do not. Then read the choice-of-law clause. In Rittmann the agreement assigned arbitration to the FAA alone, and when the FAA did not apply, nothing was left to enforce it.

Naming the CAA will not save you now, and borrowing another state’s arbitration act for California workers runs into Labor Code § 925. Fix severability, and decide whether you would rather arbitrate without a class waiver or litigate with one. A jury waiver is no way out: Grafton Partners L.P. v. Superior Court, 36 Cal.4th 944 (2005), holds predispute jury waivers unenforceable. Cal. Code Civ. Proc. § 638 judicial reference is the workable alternative, with limits: the parties pay the referee, and the decision is appealable. For owner-operators, Labor Code § 2775 applies the ABC test, and California Trucking Ass’n v. Bonta, 996 F.3d 644 (9th Cir. 2021), held the FAAAA does not preempt it as to motor carriers.

Arbitration was never cheap, because the drafting party funds it: under Cal. Code Civ. Proc. §§ 1281.97 and 1281.98 missing an invoice by thirty days is a material breach that waives the right to compel, softened by Hohenshelt v. Superior Court, No. S284498 (Cal. Aug. 11, 2025). That bill vanishes with the clause, and what replaces it is worse: a certified class is one accrual event, and most employment practices policies fund defense while excluding wage damages. Revisit the ASC 450 reserve before year-end.

How does this play out for a 170-person logistics company in Ontario?

Assume a third-party logistics company at a cross-dock in Ontario: 140 warehouse associates and 30 local drivers, all on a 2024 arbitration agreement with a class waiver and a recital that the FAA governs. The figures are illustrative. The drivers are the easy call: last leg of an interstate journey. Associates who unload containers and load outbound trailers look like Ortiz, while a returns line working goods that have come to rest is closer. Call it 110 of 170 heading to court.

Now file in San Bernardino Superior Court in February 2027: missed meal periods, off-the-clock security screening, derivative wage statement and waiting time claims, PAGA attached. Under the old rules it succeeds under the CAA. Under section 1281(b) it fails as to the exempt group, the class waiver falls with it, and the case is a putative class action. At an assumed 110 workers, one missed break a week, and a $22 blended rate, four years of meal period premiums alone runs near $500,000 before penalties or fees. Re-sorting by task and auditing meal period practices cost far less.

Frequently Asked Questions

Does AB 2155 ban arbitration in California?

No. It does not prohibit arbitration agreements or make it unlawful to ask an employee to sign one. It amends Code of Civil Procedure section 1281 so a California court will not enforce an agreement to the extent the Federal Arbitration Act would not. Most agreements, including those with office staff, are unaffected.

Which workers count as transportation workers under the FAA exclusion?

The exclusion in 9 U.S.C. section 1 covers seamen, railroad employees, and any other class of workers engaged in foreign or interstate commerce. Courts look at what the class of workers does rather than the employer’s industry or the title, so last-mile drivers and warehouse workers handling goods still in transit have qualified. An employee who never touches goods in transit does not.

Does AB 2155 apply to arbitration agreements signed before 2027?

The amendment governs enforceability, which is decided when a party asks a court to compel arbitration, so a petition filed after January 1, 2027 on a 2024 agreement will likely be judged under the new subdivision. No published decision has addressed it. Assume existing agreements are covered, not grandfathered.

Can a California employer still arbitrate with office and sales employees?

Yes, in most cases. An inside sales representative, a staff accountant, or an HR coordinator is not a transportation worker, the FAA still governs, and the new subdivision changes nothing. For a logistics company the practical answer is often two agreements, one for the office group and one written for a workforce that will litigate.

What happens to a class action waiver for drivers after AB 2155?

A class waiver written into an arbitration agreement generally falls when the agreement cannot be enforced. Class waivers are durable in California because AT&T Mobility LLC v. Concepcion held that the FAA preempts contrary state law, and that protection disappears when the FAA does not apply. Expect certification fights rather than individual arbitrations.

Does AB 2155 affect commercial contracts between businesses?

Section 1281 is a general arbitration statute rather than an employment statute, so the new subdivision reaches commercial clauses too. The practical effect is small, because the FAA’s exclusions target employment contracts and most business-to-business agreements involve interstate commerce and stay enforceable. A purely local contract is the open question.

How North Star Law Firm Can Help

North Star Law Firm works with Inland Empire and Sacramento-area logistics and warehousing companies on the paperwork this touches, from contract drafting and review to internal governance agreements and the wider business and contract law questions that follow. Phillip Zagotti is a California attorney and a CPA, which matters here because the question is not only which clause to use but what the exposure costs.

If your drivers or warehouse staff are on an arbitration agreement nobody has read since 2024, contact North Star Law Firm or schedule a consultation before January 1, 2027.

On July 27, 2026, a New York bankruptcy judge examined nineteen contracts that each declared in capital letters that they were NOT A LOAN, and ruled that every one was a loan. The funder had advanced roughly $10.88 million to a law firm and expected roughly $14.88 million back through fixed daily bank sweeps.

That ruling, In re Kossoff PLLC, Adv. Pro. No. 23-01109 (DSJ) (Bankr. S.D.N.Y. July 27, 2026), applied New York law. But the same contracts sit in the desk drawers of trucking companies in Fontana and warehouse operators in Ontario, and California law gives those businesses a different and in some ways sharper set of tools.

What did the bankruptcy court decide in Kossoff?

In the Chapter 7 case of Kossoff PLLC, a real estate law firm whose managing member diverted client funds, the trustee sued its funder, Capital Stack, LLC, over nineteen “Agreements for the Purchase and Sale of Future Receipts” signed between 2016 and 2020. In one contract, Capital Stack paid $300,000 and swept $2,190.48 from the firm’s operating account every business day until it had collected $414,000, 38 percent on top of the advance over 189 days.

Judge David S. Jones granted the trustee partial summary judgment, holding the agreements were loans as a matter of law. He called them “well drafted attempts to characterize high-return financing as asset sales,” drafted that way “at least in part because the rate of return under the agreements almost surely would violate New York usury law if the agreements were loans.”

Why did the “not a loan” label fail?

New York courts weigh three factors from LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 A.D.3d 664 (2d Dep’t 2020): whether the contract has a genuine reconciliation clause, whether it has a finite term, and whether the funder keeps recourse if the merchant goes bankrupt.

All three cut against Capital Stack. The reconciliation clause said the merchant “may request” a lower daily amount and the funder “may adjust” it, with no duty to refund over-collections. The fixed daily sweep plus a default trigger after four missed payments in a month meant the payoff date could be computed with a calculator, which is a term. And the bankruptcy carve-out applied only if the merchant was not already in default, which, given the breadth of the default provisions, would almost never be true. Seven reconciliations actually granted did not matter, because later conduct cannot rewrite an unambiguous contract.

How does California’s usury law apply to a merchant cash advance?

Article XV, § 1 of the California Constitution lets parties to a written business loan agree to interest at the higher of 10 percent per year or 5 percent over the Federal Reserve Bank of San Francisco discount rate.

The catch is the exemption list. The constitution exempts banks, credit unions, and “personal property brokers,” and Fin. Code § 22002 carries that last exemption to lenders licensed under the California Financing Law, Fin. Code § 22000 et seq. Many MCA funders hold no California license because they insist they are not lending, so a Kossoff-style ruling leaves them with a usury problem and a licensing problem at once.

The interest provision of a usurious loan is void, so the borrower owes principal only, and Civil Code § 1916-3 lets the borrower recover treble the interest paid in the twelve months before suit. California courts have looked past labels in usury cases since at least Boerner v. Colwell Co., 21 Cal. 3d 37 (1978). No published California appellate decision has yet applied the LG Funding factors to an MCA, so a judge here would draw on that principle, on In re Shoot the Moon, LLC, 635 B.R. 797 (Bankr. D. Mont. 2021), a Ninth Circuit-district case that treated eighteen advances as usurious loans, and on Kossoff.

What California rules already treat MCAs like credit?

SB 1235, codified at Fin. Code § 22800 et seq., defines “commercial financing” to include an “accounts receivable purchase transaction,” the label every MCA wears. For offers of $500,000 or less, the recipient must sign a disclosure that states, under Fin. Code § 22802(b)(6), the total cost “expressed as an annualized rate,” computed under 10 CCR § 900 et seq.. The funders’ trade group challenged the rule and lost in Small Business Finance Ass’n v. Mohseni, No. 24-50 (9th Cir. Apr. 15, 2025) (unpublished). SB 666 added Civil Code §§ 1799.300 to 1799.303, effective January 1, 2024, which bar non-bank providers from charging small businesses ACH processing fees, payoff statement fees, or “platform” fees with no service behind them, at $500 or more in statutory damages per violation.

What happens to a stacked MCA in an Inland Empire bankruptcy?

Take a hypothetical cross-dock logistics company in Ontario that took three advances over eight months in 2025. Funder A paid $120,000 for $168,000 of “future receipts” at $1,400 per business day over 120 days. Funder B paid $90,000 for $124,200 at $1,150 per day over 108 days. Funder C paid $50,000 for $71,500 at $1,100 per day over 65 days. Total funded: $260,000. Total owed: $363,700. Combined daily debit: $3,650, roughly $76,000 a month, against monthly revenue that has slipped to $310,000. Under the DFPI formula the annualized rates are near 149, 158, and 293 percent.

If the company files under Subchapter V in the Riverside Division of the Central District of California, the automatic stay under 11 U.S.C. § 362 stops the sweeps immediately. The debtor can then use § 544(b) to borrow California’s Uniform Voidable Transactions Act, Civil Code § 3439.04, and attack each advance taken while insolvent as an obligation incurred without reasonably equivalent value to the extent of the usurious premium. Payments in the prior 90 days, roughly $180,000 here (63 business days of Funder A and B debits plus about 20 days of Funder C), are preference candidates under § 547. If the advances are loans, each claim can be objected to under § 502(b) and cut to unpaid principal; Funder C, paid for only about 20 days, would drop from $71,500 to near $28,000. The books need restating too, since an advance recorded as a sale hides interest expense.

Can a funder still use a confession of judgment in California?

Since January 1, 2023, Code of Civil Procedure § 1132 provides that a judgment by confession “is unenforceable and may not be entered in any superior court.” A funder holding a New York confession may still try to enter it there and domesticate it here, so object fast. A UCC-1 filing proves nothing either way, since Commercial Code § 9109(a)(3) covers sales of accounts as well as security interests.

What should a California owner check before the next daily debit clears?

Start with the reconciliation clause. If the funder “may” adjust the daily amount and nothing requires a refund of over-collections, the contract has the flaw the Kossoff court found fatal. Pull the SB 1235 disclosure; if none was given, or the stated APR bears no resemblance to what you are paying, that is a violation and an admission. Then count the days: the 90-day preference window and the one-year treble recovery period under § 1916-3 both run against you. What goes wrong in practice is the fourth advance taken to cover the first three.

Frequently Asked Questions

Is a merchant cash advance a loan in California?

It depends on the substance of the contract, not its title. If daily debits are fixed, reconciliation is discretionary, and default remedies are broad, the funder never really bears receivables risk, and a court can treat the advance as a loan subject to California’s usury limit and licensing rules.

What is the maximum interest rate on a business loan in California?

Article XV, section 1 of the California Constitution caps interest on a written business loan at the higher of 10 percent per year or 5 percent over the Federal Reserve Bank of San Francisco discount rate, unless the lender is exempt, as banks, credit unions, and California Financing Law licensees are.

Can I get my money back if an MCA is found to be usurious?

Under Civil Code section 1916-3, a borrower who paid usurious interest can sue within one year of payment to recover three times the interest paid, and the interest provision itself is void so only principal is owed. The funder must be unlicensed and the transaction must be a loan.

Are confessions of judgment enforceable in California?

No. Code of Civil Procedure section 1132, as amended effective January 1, 2023, makes a judgment by confession unenforceable and bars superior courts from entering one, though a funder holding a New York confession may still try to enter it there and domesticate it.

Do MCA companies have to disclose an APR in California?

Yes, for commercial financing offers of $500,000 or less. Financial Code section 22802 and the DFPI regulations at 10 CCR section 900 et seq. require a signed disclosure stating the total cost as an annualized rate.

Does filing bankruptcy stop MCA daily debits?

Yes. The automatic stay under 11 U.S.C. section 362 takes effect the moment the petition is filed and stops ACH sweeps, bank levies, and collection calls. In a Subchapter V case the debtor can then object to the funder’s claim and pursue preference and fraudulent transfer recoveries.

How North Star Law Firm Can Help

North Star Law Firm represents Inland Empire and Sacramento-area businesses carrying merchant cash advances, whether the goal is to challenge the contract, restructure the debt, or stop the daily debits. Phillip Zagotti is a California attorney and a CPA, which matters because the recharacterization question turns as much on the numbers (annualized cost, preference math, how the advances were booked) as on contract language. The firm handles contract review of MCA agreements, Subchapter V reorganizations in the Riverside Division, and business debt negotiations with funders and SBA lenders. An earlier post on defendants who file Subchapter V covers the creditor side.

If daily sweeps are outrunning receipts, review the contracts before the next default notice. Reach the firm through its contact page or book a consultation at calendly.com/pzagotti-ca-legal/30min.

On August 19, 2026, the Ninth Circuit told California employers that an employee who spent a year arbitrating her discrimination claims, took discovery, and then walked away can file a fresh sexual harassment lawsuit in court and pull the rest of her case out of arbitration with it. The decision is Ding v. Structure Therapeutics, Inc., No. 25-1532 (9th Cir. Aug. 19, 2026), and for a warehouse operator in Fontana or a medical group in Roseville it changes what an arbitration agreement actually buys.

What happened in Ding v. Structure Therapeutics?

Structure Therapeutics hired Dr. Ding Ding as its CFO in December 2021 under an agreement sending all disputes to arbitration. The company terminated her in March 2022, days after she was injured in a domestic violence incident. Her October 2022 arbitration demand alleged national origin discrimination and mistreatment tied to her status as a domestic violence victim, not sex.

Discovery turned up an email from the CEO describing male candidates as the preferred “phenotype” for the job and signs he relied on complaints from male investment bankers when he let her go. In October 2023 she withdrew, citing the company’s late payment of arbitration fees. In March 2024 she sued in California Superior Court for sex discrimination and a sex-based hostile work environment under Cal. Gov. Code § 12940. The company removed the case and moved to compel arbitration; the district court refused and a divided panel affirmed.

Why didn’t filing in arbitration first count as an EFAA election?

The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, 9 U.S.C. § 401 and 9 U.S.C. § 402, says that “at the election of the person alleging conduct constituting a sexual harassment dispute,” no predispute arbitration agreement is enforceable “with respect to a case” relating to that dispute. The employer argued she got one election and used it in 2022.

The majority disagreed. An election is a choice among options, and in October 2022 Dr. Ding had none: she was not yet “alleging conduct constituting a sexual harassment dispute,” so the clause bound her. Her only election came in March 2024. Congress passed the EFAA to give victims “a real choice,” which cannot be forfeited before a plaintiff knows she has a claim.

Ordinary waiver doctrine still applies: a plaintiff who knows the facts supporting a harassment claim and either sits on it or deliberately arbitrates it can lose her EFAA rights. Judge Rawlinson, dissenting, would have treated a year of active arbitration as a knowing choice of forum.

Does one harassment claim pull the whole case out of arbitration in California?

Yes. Because the statute voids the agreement “with respect to a case,” not a claim, Dr. Ding’s domestic violence claims left arbitration with the sex-based claims. The panel relied on Bruce v. Adams & Reese, LLP, 168 F.4th 367 (6th Cir. 2026).

California courts got there first. Doe v. Second Street Corp., 105 Cal.App.5th 552 (2024), held that a FEHA hostile work environment claim is a “sexual harassment dispute” and that the EFAA blocks arbitration of every claim in the case, wage claims included. Liu v. Miniso Depot CA, Inc., 105 Cal.App.5th 791 (2024), agreed where the harassment was comments about the plaintiff’s gender expression and sexual orientation. The United States Supreme Court denied review in Liu on October 6, 2025.

How does the EFAA fit with FEHA and AB 51 after Chamber of Commerce v. Bonta?

AB 51, Cal. Lab. Code § 432.6, tried to bar mandatory arbitration. The Ninth Circuit held in Chamber of Commerce v. Bonta, 62 F.4th 473 (9th Cir. 2023), that the Federal Arbitration Act preempts it, and the statute is now permanently enjoined.

The EFAA is a carve-out from the FAA itself, so preemption is no defense. Section 402(b) adds that a court, not an arbitrator, decides whether the EFAA applies, delegation clause or not. And because FEHA harassment liability reaches employers of any size under § 12940(j), a California plaintiff can trigger the statute with a FEHA claim alone.

What does the arbitration fee deadline in CCP § 1281.98 have to do with this?

Dr. Ding left arbitration over late fee payments. Cal. Civ. Proc. Code § 1281.98 makes an employer’s failure to pay fees within 30 days after the due date a material breach. The employee may then withdraw, sue in court with the limitations period tolled, and recover her arbitration costs, and the court must impose sanctions.

The California Supreme Court softened the rule in Hohenshelt v. Superior Court (Cal. Aug. 11, 2025), holding that § 1281.98 survives FAA preemption but that relief from forfeiture under Civil Code § 3275 and CCP § 473(b) remains available for an inadvertent late payment. A willful or grossly negligent default still forfeits the forum. Put Ding and § 1281.98 together: a slipped invoice hands the employee an exit, and the EFAA lets her rebuild the case in court.

What should a Riverside employer with 40 employees do now?

Take a Riverside HVAC contractor with 40 employees. Under Cal. Gov. Code § 12950.1, supervisors need two hours of harassment prevention training and everyone else one hour, every two years, with new hires trained within six months. The agreement should carve out EFAA-covered claims by name, and its severability clause should say that if federal law excludes any claim or case from arbitration, the parties arbitrate what remains and litigate the rest.

What does the worked example look like in dollars?

Same contractor. A service coordinator terminated in August 2025 files a JAMS demand in February 2026 for retaliation and unpaid overtime. The employer pays $43,500 in JAMS filing, arbitrator, and case management fees and about $60,000 in defense fees. In September 2026 an email produced in discovery shows the dispatch supervisor rating female coordinators on appearance and calling her “too emotional to keep.” She withdraws in October 2026 and files a FEHA harassment and sex discrimination complaint in Riverside Superior Court, retaliation and overtime claims included.

Under Ding, Doe, and Liu, the employer cannot compel arbitration of any of it unless it proves she knew the sex-based facts in February. The $103,500 spent bought a discovery record the plaintiff will reuse. If the August invoice also went out 35 days late without an excuse that satisfies Hohenshelt, § 1281.98 adds her arbitration costs and a mandatory sanction.

What does an attorney-CPA see that a pure litigator might miss?

First, any settlement subject to a nondisclosure agreement runs into 26 U.S.C. § 162(q), which denies a deduction for a settlement or payment “related to sexual harassment or sexual abuse” that is subject to an NDA, and for the attorney’s fees tied to it. A $150,000 confidential settlement of a mixed case can cost an S corporation owner in the 37 percent federal bracket more than $55,000 in lost deductions unless the agreement allocates, defensibly, what is being paid for what.

Second, arbitration fees are a cash-flow item most small employers never budget. Under California’s Armendariz rule the employer bears the costs unique to arbitration, and a company that pays provider invoices on a 45-day cycle is one late check away from a § 1281.98 default.

Frequently Asked Questions

Can a California employee sue for sexual harassment after starting arbitration on other claims?

Under Ding v. Structure Therapeutics, No. 25-1532 (9th Cir. Aug. 19, 2026), yes, if she was unaware of the sex-based facts when she filed in arbitration. The EFAA election happens only when the employee first alleges a sexual harassment dispute. If she knew the facts earlier and chose arbitration anyway, a court can find waiver.

Does the EFAA apply to FEHA claims filed in California state court?

Yes. The statute reaches sexual harassment disputes under any federal, tribal, or state law, and California courts applied it to FEHA hostile work environment claims in Doe v. Second Street Corp. and Liu v. Miniso Depot.

If an employee adds a harassment claim, do her wage claims stay in court too?

Yes. The EFAA voids the arbitration agreement as to the whole case, so overtime, retaliation, and other claims filed with the harassment claim remain in court. The Ninth Circuit, the Sixth Circuit, and the California Court of Appeal agree, and the U.S. Supreme Court declined review in October 2025.

Are mandatory arbitration agreements still legal for California employers?

For most private employers, yes. The Ninth Circuit held in Chamber of Commerce v. Bonta that the Federal Arbitration Act preempts AB 51, Labor Code § 432.6, which is now permanently enjoined. The agreement cannot be enforced against a case that includes a sexual harassment dispute if the employee elects to litigate.

What happens if my company pays an arbitration invoice late in California?

Under Code of Civil Procedure § 1281.98, a payment more than 30 days after the due date is a material breach that lets the employee withdraw, sue in court, and recover her arbitration costs, with mandatory sanctions. After Hohenshelt v. Superior Court (Cal. 2025), a court can excuse a good-faith late payment, but willful or grossly negligent nonpayment still forfeits the forum.

Is a sexual harassment settlement tax deductible for the employer?

Not if it is subject to a nondisclosure agreement. Internal Revenue Code § 162(q) denies a deduction for any settlement or payment related to sexual harassment or sexual abuse that is subject to an NDA, and for the related attorney’s fees. Mixed-case settlements should allocate the payment among claims in writing.

How North Star Law Firm Can Help

North Star Law Firm advises Inland Empire and Sacramento-area employers on drafting and reviewing arbitration agreements that account for the EFAA and California’s fee-payment rules, and on structuring settlements so the tax result matches the business deal. Phillip Zagotti is a California attorney and a CPA, so the firm can handle the tax consequences of a harassment settlement and the contract questions in one engagement.

If a former employee has withdrawn from arbitration or a demand letter alleges harassment alongside wage claims, review the agreement and the fee-payment record before the response is due. Schedule a consultation at calendly.com/pzagotti-ca-legal/30min or through the firm’s contact page.

San Francisco tightened its Fair Chance Ordinance on August 10, 2026, adding new protected categories and firm response deadlines, and doubling its administrative penalties. Most Inland Empire employers will never hire someone to work in San Francisco, so it’s tempting to skip the news. That would be a mistake, because the San Francisco changes are a good prompt to check compliance with the rules that do apply in Riverside and San Bernardino counties: the statewide Fair Chance Act, California’s background check reporting statutes, and, for companies whose drivers or technicians spend time in unincorporated Los Angeles County, one of the strictest local ordinances in the state. State enforcement is active. In July 2026, the Civil Rights Department announced a $200,000 settlement with Ralphs resolving its first Fair Chance Act lawsuit.

What does California’s Fair Chance Act require of every employer with five or more employees?

Government Code § 12952 bars employers with five or more employees from asking about conviction history, or considering it, until after a conditional offer. Even then, some records are off limits entirely: arrests that didn’t lead to a conviction, participation in diversion programs, and convictions that have been sealed, dismissed, or expunged. Labor Code § 432.7 separately prohibits using those records and allows the greater of actual damages or $200 per violation, or the greater of treble damages or $500 for intentional violations, plus attorney’s fees. Under Labor Code § 432.8, misdemeanor marijuana possession convictions more than two years old are also out.

If an employer wants to rescind an offer because of a conviction, it must first make an individualized assessment of whether the conviction has a direct and adverse relationship with the specific duties of the job, considering the nature and gravity of the offense, the time that has passed since the offense and the completion of the sentence, and the nature of the job. It then sends a preliminary notice identifying the conviction and including a copy of any report, and it gives the applicant at least five business days to respond, with five more if the applicant disputes the record and is gathering evidence. The final decision must be in writing and must explain any internal appeal process and the right to file a complaint with the Civil Rights Department. The department’s sample Fair Chance Act forms are a practical starting point.

What did the 2023 regulations add?

The Civil Rights Council’s amended regulation, Cal. Code Regs., tit. 2, § 11017.1, took effect October 1, 2023, and it’s where many employers get caught. Job postings can’t say “no felons” or “must have a clean record.” Employers can’t use a background check or an internet search to learn about conviction history before making an offer. Evidence of rehabilitation is something the applicant may offer, not something the employer may require. Policies that automatically disqualify people for convictions seven or more years old are subject to a rebuttable presumption that they aren’t tailored enough. And the definition of “employer” reaches staffing agencies and the businesses that take workers from them, while “applicant” includes someone who’s already started work under a conditional offer. For a Moreno Valley fulfillment center that brings in seasonal workers through an agency, both companies can be responsible for getting the process right.

Do local ordinances add stricter rules near the Inland Empire?

Yes, and the one that matters most isn’t San Francisco. The Los Angeles County Fair Chance Ordinance for Employers, effective September 3, 2024, covers employers with five or more employees that do business in unincorporated Los Angeles County, for workers who average at least two hours of work a week there, including remote work. It bars considering most convictions more than seven years old, with exceptions for jobs involving minors, dependent adults, people 65 or older, and public funds. It requires written assessments before and after the applicant’s response, and it authorizes penalties of up to $5,000, $10,000, and $20,000 per affected person for successive violations. An Ontario distributor whose merchandisers regularly service stores in unincorporated areas like East Los Angeles or Hacienda Heights should assume it’s covered. The City of Los Angeles has its own ordinance for employers with ten or more employees.

San Francisco’s ordinance applies to employers with five or more employees for jobs involving at least eight hours of work a week in the city. According to published summaries of the August 2026 amendments, they bar reliance on out-of-state arrests or convictions for conduct that’s lawful in California involving abortion care, miscarriage, gender-affirming care, and drag performance. They also require the employer to confirm an applicant’s response in writing within 14 days and to send the final notice within 30 days, and they raise administrative penalties to $1,000 for a first violation, $2,000 for a second, and $4,000 for each one after that. The city’s Fair Chance Ordinance page covers the basics, and its August 2026 poster reflects the update.

What can a background check company legally report in California?

Less than federal law allows. The Fair Credit Reporting Act lets consumer reporting agencies report convictions indefinitely, but California’s Investigative Consumer Reporting Agencies Act, Civil Code § 1786.18(a)(7), bars reporting convictions whose date of disposition, release, or parole is more than seven years before the report. Before ordering a report, the employer must give a stand-alone disclosure identifying the screening company and the scope of the investigation, with a box the applicant can check to receive a copy, which is due within three business days under § 1786.16. The federal requirements in 15 U.S.C. § 1681b(b) run alongside: a separate disclosure and written authorization before the check, and a copy of the report plus the federal summary of rights before any adverse action.

Two more statutes trip up hiring managers. Labor Code § 1024.5 limits credit reports to specific positions, such as managers and jobs with access to large amounts of cash or confidential financial data, so a warehouse picker isn’t a lawful credit check position. And Government Code § 12954, effective since January 1, 2024, generally bars decisions based on off-duty cannabis use or on drug tests that detect only nonpsychoactive cannabis metabolites, and bars asking applicants about past cannabis use, with exceptions for construction trades and jobs requiring federal background checks.

What does a compliant hiring decision look like in practice?

Suppose a Moreno Valley fulfillment center, working through a staffing agency, extends conditional offers to 60 seasonal pickers and packers. The job postings say nothing about criminal records, and the offers go out before any screening begins. Each candidate then signs the federal disclosure and authorization and the separate California disclosure. One candidate’s report shows a 2019 Nevada misdemeanor petty theft conviction; the case was resolved in March 2019 and probation ended in March 2020.

The first question is whether the screening company should have reported it at all. Counted from the March 2019 disposition, the conviction falls outside California’s seven-year window in 2026. Counted from the end of probation, it doesn’t until March 2027. The statute doesn’t clearly say which date controls when a sentence includes probation, so the employer should ask how its vendor applies the rule. If the conviction is properly on the report, the assessment comes next. Theft has some relationship to a job handling merchandise, but the offense was a misdemeanor, it’s more than seven years old, and the candidate has worked steadily since. A blanket rule screening out this candidate would run into the regulation’s presumption against policies built on older convictions, and an individualized assessment on these facts points away from rescinding the offer. If the employer still has concerns, it sends a combined state and federal preliminary notice with the report and summary of rights, waits at least five business days for a response, considers anything the candidate submits, and documents its final reasoning. Everything goes in a file kept for four years.

Enforcement makes the paperwork worth doing. In June 2026, the Civil Rights Department announced a $93,000 resolution with the City of Signal Hill over a withdrawn offer based on older, unrelated convictions without an individualized assessment. The Ralphs settlement in July added years of reporting obligations on top of the payment. A bill to expand the state law, AB 2095, was reportedly moved to the Assembly’s inactive file in May 2026, but the current rules already give the department plenty to enforce.

Hiring updates rarely happen one at a time. Employers revising offer letters this year should also check their sign-on bonus terms under the new stay-or-pay law and budget for the 2027 minimum wage and exempt salary increase.

Frequently Asked Questions

Can a California employer ask about criminal history on a job application?

No. Employers with five or more employees can’t ask about or consider conviction history until after making a conditional job offer, and some records, like arrests without conviction, can never be considered.

How long does an applicant have to respond to a preliminary notice?

At least five business days under state law, plus five more if the applicant disputes the record and is obtaining evidence. Local ordinances in Los Angeles County and San Francisco set their own timelines.

Can a background check in California include convictions older than seven years?

Generally no. California law bars screening companies from reporting convictions dated more than seven years from disposition, release, or parole, which is stricter than federal law.

Does the Los Angeles County Fair Chance Ordinance apply to Inland Empire companies?

It can. It covers employers with five or more employees for workers averaging at least two hours a week in unincorporated Los Angeles County, even if the company is based elsewhere.

Is a staffing agency or its client responsible for Fair Chance compliance?

Potentially both. California’s regulation includes staffing agencies and the businesses that obtain workers from them within the definition of employer, so contracts should assign who does the assessment and sends notices.

What changed in San Francisco’s Fair Chance Ordinance in August 2026?

It added protection for out-of-state records involving conduct lawful in California, such as abortion and gender-affirming care, set 14-day and 30-day employer deadlines, and doubled administrative penalties.

How North Star Law Firm Can Help

North Star Law Firm helps California employers update hiring forms, staffing agency agreements, and background check workflows so they match state and local Fair Chance rules. The firm’s business and contract law practice covers the vendor and staffing contracts that decide who’s responsible when a notice is missed, and its contract drafting and review service handles offer letters and screening authorizations. Phillip Zagotti is a California attorney and a CPA who works with Inland Empire and Sacramento businesses on the legal and financial sides of growth. Employers preparing for seasonal hiring can schedule a consultation.

Few letters surprise a California business owner like a withdrawal liability demand. A concrete contractor in Riverside, a grocery distributor in San Bernardino, or a trucking company in Fontana decides to stop contributing to a union pension plan, whether by closing a yard, selling assets, or letting a contract lapse, and months later the plan’s actuary sends a bill for the company’s share of the plan’s unfunded vested benefits. The number is often seven figures. On August 10, 2026, the Ninth Circuit affirmed a ruling that cut one of those bills by roughly $30 million, and the case shows both how much the actuary’s assumptions matter and how unforgiving the statute’s deadlines are.

What did the Ninth Circuit decide in City of Tacoma?

The City of Tacoma withdrew from the Western Metal Industry Pension Fund, and in November 2021 the fund demanded $44,325,881. Its actuary had discounted the fund’s future benefit obligations using the Pension Benefit Guaranty Corporation’s annuity purchase rates of 2.84% and 2.53%, even though the same fund assumed a 7% return when setting contributions for employers who stayed. A lower discount rate makes the present value of future benefits larger, so the choice multiplied the city’s bill. An arbitrator found the PBGC rates improper and ordered a recalculation at 7%, and the district court affirmed, noting the rate choice had increased the assessment by about $30 million.

In an unpublished memorandum, City of Tacoma v. Western Metal Industry Pension Fund, No. 25-4055 (9th Cir. Aug. 10, 2026), the court agreed that the PBGC rates didn’t reflect the plan’s own assets or expected experience, as ERISA requires. It followed its published decision in GCIU-Employer Retirement Fund v. MNG Enterprises, Inc., 51 F.4th 1092 (9th Cir. 2022), which arose from the Central District of California. Rather than sending the question back to the actuary, the panel upheld the order to use the 7% funding rate, because the fund’s own actuary had described that rate as based on expected returns. It denied Tacoma’s request for attorney’s fees, citing the fund’s ability to pay and the effect on participants. The city won, but only after years of arbitration and federal court review.

Why is the interest rate the whole fight?

Because the unfunded vested benefits calculation is a present value, and small changes in the discount rate move it enormously. 29 U.S.C. § 1393(a) requires withdrawal liability assumptions that, taken together, offer the actuary’s best estimate of anticipated experience under the plan. The Sixth Circuit in Sofco Erectors, Inc. v. Trustees of the Ohio Operating Engineers Pension Fund, 15 F.4th 407 (6th Cir. 2021), and the D.C. Circuit in United Mine Workers of America 1974 Pension Plan v. Energy West Mining Co., 39 F.4th 730 (D.C. Cir. 2022), reached similar conclusions about rates untethered to the plan’s investments.

Two developments could shift the ground. In M & K Employee Solutions, LLC v. Trustees of the IAM National Pension Fund, decided May 21, 2026, the Supreme Court held that assumptions adopted after the measurement date can be used, while leaving other questions open. And the PBGC has a 2022 proposed rule that would let plans pick any rate from the PBGC’s own rates to the funding rate, including blends. The federal regulatory agenda targets a final rule for November 2026. If it’s adopted as proposed, arguments like Tacoma’s would get harder. Plans that received Special Financial Assistance under the American Rescue Plan are a separate category: 29 C.F.R. § 4262.16(g) requires them to use PBGC rates for years, so the Tacoma argument generally won’t help an employer leaving one of those plans.

What deadlines apply after a demand letter arrives?

This is where employers lose cases they could have won. Under § 1399(b)(2), the employer has 90 days after receiving the demand to ask the plan to review it. Payments still start within 60 days of the demand, regardless of any review request, under the “pay now, dispute later” rule in § 1399(c)(2). Arbitration must be initiated within 60 days after the earlier of the plan’s response to the review request or 120 days after the request, under § 1401(a)(1). Miss that window and the amount becomes due and owing, with no chance to challenge the actuary’s rate. Miss a payment and, 60 days after written notice, the plan can accelerate the entire balance and sue for interest, liquidated damages equal to the greater of interest or 20%, and attorney’s fees.

How much can the rate change a small employer’s bill?

Here’s a simplified illustration, not an actuarial calculation. Suppose a Riverside concrete contractor stops contributing but keeps doing nonunion work in the same area, which counts as a complete withdrawal under the construction industry rule in § 1383(b). Assume its allocable share of vested benefits is a stream of $500,000 a year for 25 years, and its share of plan assets is $5 million. Discounted at 7%, those benefits are worth about $5.83 million, leaving withdrawal liability of roughly $827,000. At 2.5%, they’re worth about $9.21 million, and the liability jumps to about $4.21 million, roughly five times as much.

The payment schedule changes the real cost again. The statute sets annual payments from the employer’s historical contributions, say 18,000 hours at a $10 contribution rate, or $180,000 a year, and amortizes the liability at the plan’s funding rate, capped at 20 years of payments under § 1399(c)(1)(B). The $827,000 liability is paid off in about six years, roughly $1.03 million in total. The $4.21 million liability generates more annual interest than the payment covers, so the employer pays the full 20 years, $3.6 million. The rate dispute is worth about $2.57 million in actual cash.

What happens when the business is sold, or files bankruptcy?

A stock sale usually isn’t a withdrawal, because the contributing employer doesn’t change. An asset sale is a withdrawal unless the parties follow § 1384 precisely: the buyer must take on substantially the same contribution obligation, post a bond or escrow for five plan years, and the seller stays secondarily liable if the buyer withdraws during that period. Buyers can inherit liability even outside that section. In Resilient Floor Covering Pension Trust Fund v. Michael’s Floor Covering, Inc., 801 F.3d 1079 (9th Cir. 2015), the court held that a buyer with notice of the liability that continues substantially the same business can be a successor. Any deal that looks designed to dodge the liability can be disregarded under § 1392(c). Our post on California assignments for the benefit of creditors covers related sale structures for distressed companies.

Owners also need to know about controlled group exposure. Under § 1301(b)(1), all trades or businesses under common control are treated as one employer. In Board of Trustees of the Western Conference of Teamsters Pension Trust Fund v. Lafrenz, 837 F.2d 892 (9th Cir. 1988), owners who leased trucks to their own company were running a trade or business and became personally liable. The modern version is the family trust or LLC that owns the yard and leases it to the union contractor. That entity may be swept into the controlled group, and if the leasing activity isn’t run through a separate corporation or LLC, the owners’ personal assets can be at risk. Estate plans and entity structures for these businesses should be reviewed with that rule in mind.

In bankruptcy, liability from a withdrawal before the filing is generally a nonpriority unsecured claim that can be discharged or paid a percentage under a plan, as in Trustees of the Amalgamated Insurance Fund v. McFarlin’s, Inc., 789 F.2d 98 (2d Cir. 1986). The Third Circuit has given administrative priority to the portion tied to work after the petition, and the Ninth Circuit hasn’t decided that question. Controlled group members that don’t file bankruptcy remain fully liable. On the tax side, 26 U.S.C. § 404(g) treats withdrawal liability payments as deductible plan contributions.

Frequently Asked Questions

What is multiemployer pension withdrawal liability?

It’s an employer’s share of a union pension plan’s unfunded vested benefits, assessed when the employer stops contributing in whole or in part. ERISA requires the employer to pay it in installments or a lump sum.

How long do I have to challenge a withdrawal liability assessment?

You have 90 days after receiving the demand to request review, and you must start arbitration within 60 days after the earlier of the plan’s response or 120 days after your request. Missing arbitration makes the amount final.

Do I have to pay while I dispute the assessment?

Yes. Installments begin within 60 days of the demand even if you’ve requested review or started arbitration. Refunds are available if you win.

Are PBGC annuity rates allowed for withdrawal liability in the Ninth Circuit?

Under the Ninth Circuit’s published GCIU decision, followed in the unpublished City of Tacoma memorandum, using PBGC annuity rates that don’t reflect the plan’s expected experience is improper. Plans receiving Special Financial Assistance are required to use PBGC rates for a period of years.

Does selling my company’s assets trigger withdrawal liability?

Generally yes, unless the sale meets § 1384, which requires the buyer to assume substantially the same contribution obligation and post a bond or escrow, with the seller remaining secondarily liable for five years.

Can owners be personally liable for withdrawal liability?

Not usually for a corporation’s liability, but owners can be liable through commonly controlled trades or businesses, such as a sole proprietorship or an unincorporated leasing activity serving the company.

How North Star Law Firm Can Help

North Star Law Firm helps California employers review withdrawal liability demands, meet review and arbitration deadlines, structure business sales around § 1384, and evaluate bankruptcy options when the liability threatens the company. Phillip Zagotti is a California attorney and a CPA, which lets the firm test the actuary’s assumptions and model payment scenarios alongside the legal defenses. Learn more about the firm’s work on buying and selling a business, business sale tax structuring, and Subchapter V reorganization.

California’s statewide minimum wage goes from $16.90 to $17.40 an hour on January 1, 2027, following the Department of Finance’s certification at the end of July. Most employers read that as a 40-cent line item for hourly staff. The bigger number is hidden one step away. California ties the salary floor for exempt executive, administrative, and professional employees to twice the minimum wage, so on New Year’s Day the minimum salary for an exempt office manager becomes $72,384 a year. A salaried manager at $70,000 in a Rancho Cucamonga dental office or a Sacramento HVAC company isn’t just due for a raise next year. That manager is already below the 2026 line.

How is California’s minimum wage set each year?

Labor Code § 1182.12(c) requires the Director of Finance to calculate the adjustment by August 1. The increase is the lesser of 3.5% and the change in the U.S. Consumer Price Index for Urban Wage Earners and Clerical Workers over the July-to-June period, rounded to the nearest ten cents, and it can’t go down. This year the index rose just under 3%, which moves $16.90 to $17.40. The Department of Industrial Relations announced the figure and the resulting salary threshold in a news release.

What does the new rate mean for exempt salaried employees?

Labor Code § 515(a) sets the salary floor for exempt executive, administrative, and professional employees at double the state minimum wage for a 40-hour week. For 2027 that’s $17.40 times 2 times 2,080 hours, or $72,384 a year, which is $6,032 a month. The 2026 figure is $70,304. The threshold uses the full-time amount even for someone who works a reduced schedule, so a three-day-a-week exempt controller needs the same salary as a full-time one.

Salary alone never makes someone exempt in California. The employee must also be primarily engaged in exempt duties, which California measures as more than half of actual worktime, and must regularly exercise discretion and independent judgment. The federal test is looser. After a federal court vacated the Labor Department’s 2024 salary rule, the department formally restored the $684-a-week federal threshold in a May 15, 2026 technical amendment. That’s $35,568 a year, less than half of California’s number. Multistate employers that build pay bands around federal rules routinely miss California’s.

Do Inland Empire or Sacramento cities have a higher local minimum wage?

Not currently. The UC Berkeley Labor Center’s inventory of local wage ordinances lists none in Riverside, San Bernardino, Sacramento, Placer, Yolo, or El Dorado counties, so the state rate governs throughout both regions. The exception to watch is geography. Unincorporated Los Angeles County and the City of Los Angeles both set their own higher rates, reported at $18.47 and $18.42 as of July 1, 2026. An Ontario or Pomona Valley employer whose service techs or merchandisers spend part of the week in those areas may owe the local rate for those hours. Local ordinances can change mid-year, so check the inventory before budgeting.

Which industries follow a different minimum wage?

Two sectors have their own schedules. Limited-service restaurants in national chains with more than 60 locations pay at least $20 an hour under the fast food law, Labor Code § 1474 and following, and as of early September the Fast Food Council hadn’t adopted an increase. Health care is more complicated. Under Labor Code § 1182.14, covered health care employers moved to new rates on July 1, 2026: $25 an hour for large health systems and dialysis clinics, $23 for most other covered facilities, and $22 for covered clinics, which step to $25 on July 1, 2027. Safety-net and rural hospitals follow a slower path. The Department of Industrial Relations’ health care minimum wage FAQ lists covered facility types, and a private dental practice isn’t one of them. A stand-alone dental office in Temecula generally follows the $17.40 state rate, though a practice affiliated with a covered clinic may not.

What does the change cost a typical small business?

Take a Sacramento HVAC contractor with two salaried office managers at $70,000 and eight full-time hourly employees at $17.00. The managers are already misclassified in 2026, because $70,000 is $304 short of the $70,304 threshold. For 2027, bringing both to $72,384 costs $4,768 in added salary, and raising the eight hourly workers to $17.40 costs $6,656. Employer Social Security and Medicare at 7.65% adds about $874. The total is roughly $12,300 a year before any overtime is paid at the higher rate. Federal and state unemployment taxes don’t increase, because each worker already earns more than the $7,000 taxable wage base, and State Disability Insurance is withheld from employees at 1.3% with no wage cap in 2026.

There’s a separate cost that has nothing to do with the raise. Because California still owes the federal government for unemployment insurance loans, employers here lose part of their federal unemployment tax credit. EDD reports the reduction for 2025 wages was 1.2%, which makes the effective federal unemployment tax $126 per employee, and it projects a 1.5% reduction for 2026, or $147 per employee, subject to the Labor Department’s final determination in November. For ten employees, the credit reduction alone would add about $1,050 for 2026. EDD’s FUTA credit reduction page tracks the numbers.

The alternative to raising salaries is converting managers to hourly pay. A $70,000 salary works out to $33.65 an hour, with overtime at $50.48, and it brings meal and rest period obligations, timekeeping, and daily overtime under the rules we covered in our post on California overtime and the federal deduction. For most small offices, the raise is cheaper than the conversion.

What’s the exposure if a salaried employee is misclassified?

It adds up faster than owners expect. An employee treated as exempt who doesn’t meet the salary or duties test can recover unpaid overtime with interest, attorney’s fees, and costs under § 1194, generally reaching back three years, or four under the Unfair Competition Law. Missed meal and rest periods add an hour of pay per workday under § 226.7, and the California Supreme Court held in Naranjo v. Spectrum Security Services, Inc. (2022) 13 Cal.5th 93 that those premiums are wages, which can support wage statement claims under § 226 (capped at $4,000 per employee) and waiting time penalties of up to 30 days’ pay under § 203 when the employee leaves. On top of that, the Private Attorneys General Act allows civil penalties, though the 2024 reforms cap them at 15% or 30% of the default amount for employers that take reasonable compliance steps before or promptly after receiving notice.

Does any of this apply to S corporation owners who pay themselves a salary?

The tax rule and the wage rule are separate questions, and owner-employees sometimes blur them. For federal tax purposes, an S corporation shareholder who works in the business must take reasonable compensation as wages, as the IRS explains in its guidance on S corporation officers. Reasonable compensation is measured against what the services are worth, not against the exempt salary floor. California wage-and-hour law, meanwhile, has no general exception for owners who draw a salary. The federal regulation that treats a 20% owner who actively manages the business as exempt regardless of pay doesn’t appear to have a California counterpart. An owner-manager who draws $50,000 in wages to hold down payroll tax isn’t automatically exempt under § 515, and that can matter if the relationship among co-owners sours and one of them files a wage claim. Planning the owner’s salary is worth doing with both rules on the table.

Frequently Asked Questions

What will California’s minimum wage be in 2027?

$17.40 an hour statewide starting January 1, 2027, up from $16.90. Some cities and industries, including fast food and covered health care employers, have higher rates.

What is the minimum salary for an exempt employee in California in 2027?

$72,384 a year, or $6,032 a month, which is two times the state minimum wage for full-time work. The 2026 threshold is $70,304.

Can I pay a part-time exempt employee a prorated salary?

No. The salary test is based on full-time employment, so an exempt employee working a reduced schedule still needs at least the full threshold amount to keep the exemption.

Do Riverside or San Bernardino County cities have their own minimum wage?

Not currently. The state rate applies there and in the Sacramento region, but workers who spend time in unincorporated Los Angeles County or the City of Los Angeles may be owed those local rates.

Does the health care minimum wage apply to dental offices?

Private dental practices aren’t on the state’s list of covered health care facilities, so they generally follow the statewide minimum wage. Practices tied to a covered clinic should check their status.

Does the federal $684-a-week salary level matter in California?

Only for federal overtime purposes. California employers must meet the higher state threshold and California’s stricter duties test to treat an employee as exempt.

How North Star Law Firm Can Help

North Star Law Firm helps California small businesses review exempt classifications, budget payroll changes, and set owner compensation that works under both wage-and-hour law and tax law. Phillip Zagotti is a California attorney and a CPA, so a classification review can include the payroll tax and S corporation consequences in the same engagement. Learn more about the firm’s business and contract law practice, its payroll tax work, and S corporation planning, or schedule a consultation before your 2027 budget is final.

For years, the standard California sign-on bonus looked the same: a check on day one and a promise to pay it back if the employee quit within a year or two. Since January 1, 2026, that promise is unlawful unless it’s built exactly the way the Legislature now requires. Assembly Bill 692, signed October 13, 2025 as Chapter 703 of the Statutes of 2025, added Business and Professions Code § 16608 and Labor Code § 926, and it reaches much further than bonuses. Training repayment agreements, quit fees, and replacement hire fees all fall inside it.

Most of the commentary has focused on HR forms. This post covers what the statute actually says, where Inland Empire logistics and healthcare employers are most exposed, and a piece nobody seems to talk about: what happens on the tax side when an employee really does pay a bonus back.

What does AB 692 prohibit?

Section 16608(b)(1) makes it unlawful to include, or to require a worker to sign, a contract term that makes the worker pay the employer, a training provider, or a debt collector if employment ends, that restarts collection on a debt when employment ends, or that imposes any penalty, fee, or cost on the worker for leaving. The definitions are deliberately broad. A “debt” counts whether it’s certain or contingent, so a conditional bonus that becomes repayable on resignation is a debt. The listed penalties include replacement hire fees, retraining fees, quit fees, immigration and visa cost reimbursement, liquidated damages, lost goodwill, and lost profit. “Employer” includes affiliates, contractors, and third-party agents, and “worker” includes applicants and training program participants.

The law applies only to contracts entered into on or after January 1, 2026. Agreements signed in 2025 aren’t voided by AB 692, although they still have to survive older rules like Labor Code § 2802 and § 16600.

When can an employer still recover a sign-on bonus?

Only through the exception in § 16608(b)(2)(D), and only if every condition is met. The payment has to be a discretionary or unearned payment made at the outset of employment that isn’t tied to job performance. The repayment terms must sit in an agreement separate from the offer letter or employment contract. The employee must be told of the right to consult a lawyer and given at least five business days to do it. Repayment can’t carry interest and has to be prorated over the remaining retention period, which can’t exceed two years from the payment date. The employee must be offered the choice to defer the bonus until the end of the retention period with no repayment obligation at all. Finally, repayment can be triggered only by a separation at the employee’s sole election or a termination for misconduct, which the statute ties to the unemployment insurance definition in Unemployment Insurance Code § 1256. A layoff, a position elimination, or a firing for poor fit ends the obligation.

Retention bonuses paid to existing employees are the harder problem. The exception covers payments “at the outset of employment,” so a mid-career retention bonus with a clawback doesn’t fit it. Employers that want the same effect can pay the retention bonus in installments as service is performed, or pay it in full on the retention date. Both approaches avoid a repayment obligation entirely.

Are training repayment agreements dead in California?

Mostly, and the details matter for the Inland Empire. The statute allows tuition repayment only for a “transferable credential,” and it defines that term as a degree from an accredited third-party institution that isn’t required for the current job and is useful for employment elsewhere. The repayment agreement must be separate from the employment contract, state the amount up front without exceeding the employer’s actual cost, prorate over the required service period without acceleration, and require nothing if the worker is terminated other than for misconduct.

Read that definition next to how warehouses in Ontario and Fontana actually train people. Employer-paid commercial driver’s license programs, forklift certifications, and similar certificates aren’t degrees. On the statute’s plain text, a clause making a driver repay CDL school costs after quitting doesn’t fit the tuition exception. The one remaining route is enrollment in an apprenticeship program approved by the Division of Apprenticeship Standards under § 16608(b)(2)(C). Before AB 692, the Court of Appeal had upheld a voluntary training reimbursement agreement in USS-POSCO Industries v. Case (2016) 244 Cal.App.4th 197. For agreements signed in 2026 and later, that decision no longer describes the rules.

What happens if an employer gets it wrong?

A noncompliant term is void as against public policy under § 926(a), and § 16608(c) separately declares the contract a restraint on trade that’s void under § 16600. The worker, or a worker representative, can sue individually or on behalf of similarly situated workers for actual damages or $5,000 per worker, whichever is greater, plus injunctive relief and attorney’s fees. Because the statute routes the violation through § 16600, there’s a credible argument that the fee-shifting remedy and its “regardless of where and when the contract was signed” language in § 16600.5 apply as well, which undercuts the idea that an out-of-state choice-of-law clause can save the agreement. Labor Code § 925 already makes those clauses voidable for employees who live and work in California unless the employee was individually represented by counsel. Several employer-side firms also flag Private Attorneys General Act exposure. The bill doesn’t mention PAGA, and no court has decided the question yet.

A $5,000 statutory minimum per worker turns a form sign-on agreement used for 80 seasonal hires into $400,000 of potential exposure before fees. That’s the number that should drive the review.

Can the employer just take the bonus out of the final paycheck?

No. Labor Code § 221 makes it unlawful to collect back wages already paid, and the Court of Appeal held in Barnhill v. Robert Saunders & Co. (1981) 125 Cal.App.3d 1 that an employer can’t set off a debt against final wages. The Labor Commissioner’s deductions FAQ says the same about lump-sum deductions of loan balances. A compliant repayment obligation has to be collected like any other debt: a written demand, a payment plan, or a lawsuit. A business plaintiff in California small claims court is capped at $6,250, which is less than many sign-on bonuses, and suing on a noncompliant agreement invites a § 926 cross-claim.

How is a repaid bonus taxed?

Here’s where an attorney-CPA view helps, because the tax consequences land on both sides and they don’t mirror each other. Consider an Ontario distribution center that pays a forklift supervisor a $12,000 sign-on bonus on March 2, 2026, under a compliant agreement with a 24-month retention period. He resigns at the end of month nine. The most he can owe is the prorated share for the 15 months remaining: 15/24 of $12,000, or $7,500.

His take-home on the bonus was smaller than that. With flat supplemental withholding of 22% federal and 10.23% California, plus Social Security, Medicare, and 1.3% State Disability Insurance, the net check was $7,058.40. He owes back gross dollars, which is more than he ever received.

If he repays in 2026, the employer simply reduces his 2026 wages and adjusts withholding and FICA through Form 941-X, as IRS Publication 15 describes. If he repays in 2027, his 2026 Form W-2 box 1 doesn’t change. The employer issues a Form W-2c reducing Social Security and Medicare wages, refunds his share of FICA after getting his written statement, and recovers both shares on Form 941-X. California’s EDD says employers shouldn’t refund prior-year personal income tax withholding.

For his own return, federal law allows relief only if the repayment is more than $3,000, through the claim-of-right rule in 26 U.S.C. § 1341. At a 12% bracket, the credit method would give him about $900. There’s a caveat worth stating plainly: we haven’t found a ruling applying § 1341 to a bonus clawback triggered by a voluntary resignation, and the IRS could argue he had an unrestricted right to the money when he received it. Repayments of $3,000 or less get nothing federally, because the suspension of miscellaneous itemized deductions is now permanent. California is friendlier. It never adopted that suspension, so a smaller repayment remains a miscellaneous itemized deduction subject to the 2% floor, and Revenue and Taxation Code § 17049 supplies a state claim-of-right rule for larger amounts.

What should California employers do now?

Pull every offer letter, bonus agreement, training agreement, and relocation package template used since January 1, 2026, and sort them by the table above. Move any repayment terms into a stand-alone agreement with the attorney-consultation notice and a deferral election. Replace mid-employment retention clawbacks with installment or cliff payments. Stop using certificate training repayment clauses unless the program runs through a DAS-approved apprenticeship. And coordinate with payroll before the first repayment arrives, because the W-2c and 941-X steps are easy to miss in January.

Frequently Asked Questions

Does AB 692 apply to agreements signed before 2026?

No. It applies to contracts entered into on or after January 1, 2026. Older agreements are still subject to prior California law, including Labor Code § 2802 and Business and Professions Code § 16600.

Can a California employer make a new hire repay a sign-on bonus?

Yes, but only under a separate agreement with a five-business-day attorney review notice, no interest, proration over a retention period of two years or less, an option to defer the bonus, and repayment only after a voluntary resignation or misconduct termination.

Can an employer require repayment of a retention bonus?

Retention bonuses paid after the start of employment don’t fit the statutory exception. Employers typically pay them in installments or on the retention date instead of up front with a clawback.

Can I be required to repay CDL or forklift training costs if I quit?

Generally not under an agreement signed in 2026 or later. The tuition exception covers only accredited degrees. Certificate training repayment is allowed only through a state-approved apprenticeship program.

What are the penalties for a noncompliant stay-or-pay clause?

The term is void, and the worker can recover actual damages or $5,000 per worker, whichever is greater, plus injunctive relief and attorney’s fees, individually or as a class.

Is a repaid sign-on bonus tax deductible?

Federally, only repayments over $3,000 qualify, through the claim-of-right rules, and their application to a voluntary quit isn’t settled. California still allows smaller repayments as a miscellaneous itemized deduction and has its own claim-of-right statute.

How North Star Law Firm Can Help

North Star Law Firm drafts and reviews employment-related agreements for California businesses, including sign-on bonus, tuition, and relocation agreements, and it handles the payroll tax corrections that follow when money comes back. Phillip Zagotti is a California attorney and a CPA, which lets the firm answer the contract question and the W-2c question in the same conversation. See the firm’s contract drafting and review services, its broader business and contract law practice, and its payroll tax work. Employers updating 2026 templates can schedule a consultation to walk through their forms.