Firm News & Events

Potential Mileage Tax and Employer Reimbursements

by Emmanuel P. Jimenez

April 10, 2026

Question: I heard that California is considering passing a mileage tax. Is that true? If it did, would I have to reimburse my employees for the tax?

Answer: No, the Legislature isn’t currently considering a mileage tax—although there is a proposal to study whether one should be enacted.  If such a tax is enacted, however, employers would likely need to reimburse their employees for the tax.   

For starters, a proposed mileage tax is not currently pending in the state Legislature.  However, the Legislature is actively considering whether one should be enacted in the near future.  Assembly Bill 1424 (AB 1421) proposes to direct the California Transportation Commission (CTC) to evaluate whether a mileage tax system can serve as an alternative to California’s current gas tax.  The CTC would be required to evaluate whether a mileage tax could replace California’s gas tax and, by January 1, 2027, would make a recommendation regarding whether the state should pass a mileage tax.  So, while a mileage tax isn’t imminent, it could be on the horizon for California taxpayers, and employers, in the next several years.

If enacted, one chief impact for employers would be reimbursements.  Labor Code section 2802 requires employers to indemnify employees for “all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.”  Put another way, employers must reimburse any reasonable costs employees incur while performing their job.  The Legislature enacted section 2802 to ensure that employers do not shift the costs of doing business onto their employees.

California courts have adopted a very broad interpretation of section 2802.  The most common example is that employers must reimburse employees for the business-related use of their personal cars.  Employers do this by either paying the employee’s actual expenses—which requires detailed tracking—or paying a reasonable per-mile rate. Similarly, employers must reimburse employees for the business-related use of an employee’s personal cellphone, even if the employee has an unlimited data plan and incurs no out-of-pocket cost.

If a mileage tax were passed, employers would potentially be required to reimburse employees for the entirety of that cost, at least for business-related driving.  The mileage tax would be a direct, government-imposed cost that is incurred during the performance of a specific task: driving.  As long as the driving were work-related, the mileage tax paid by an employee would likely count as a “necessary expenditure” that was incurred “in direct consequence” of performing the employee’s job duties.  So, an employer would potentially be liable for the entirety of the mileage tax.

This could represent a significant, and complex, new cost for employers.  Given California’s size, long commutes are common.  And the rule between reimbursable and non-reimbursable travel can be complicated.  For example, an employee’s primary home-to-work commute is not reimbursable. But travel to an alternate location (e.g., temporary worksite or client meeting) is potentially reimbursable.  Similarly, for workers with no fixed office, travel from their home to their first worksite is typically reimbursable.

Employers should keep a close eye on AB 1421 as it moves through the Legislature. Even a modest mileage tax could mean substantial new costs for employers—and potential liability for misclassifying reimbursable travel.  Employers with questions about AB 1421 or general questions about employee reimbursements should contact their labor counsel.

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Requirements for Tip Pooling Arrangements

by Marco A. Lucido

March 27, 2026

Q: I run a small restaurant, and I want to make sure that everyone is rewarded equally for their hard work. Can I ask my tipped employees to share part of their tips with other employees?

A: Yes, but you need to follow some important guidelines and be aware of the limitations. The practice of requiring employees to share their tips in previously agreed percentages is commonly known as a mandatory “tip pool.”  In California, employers can require employees to participate in a tip pool if the pool meets certain conditions.  These conditions are:

• Tipped employees should generally not be asked to contribute more than 15% of their tips to the tip pool;
• Owners and supervisors should not be allowed to participate in any portion of the tip pool;
• Tip pool participants should be limited to those employees who contribute in the “chain of service”; and
• The money from the tip pool must be distributed to the eligible employees in the “chain of service” based on the number of hours they worked.

Sometimes, the most difficult requirement to navigate is the requirement to limit the tip pool participants to employees in the “chain of service.”  This is because employers often want to allow back of the house employees such as chefs, cooks, and dishwashers to participate in the tip pool.  Historically, the Labor Commissioner’s position is that only front of the house employees who provide direct table service can participate in a tip pool.  In a 2005 Opinion Letter, the Labor Commissioner indicated that in the restaurant industry employees in the “chain of service” include “waitpersons, buspersons, bartenders, hostesses, wine stewards and ‘front room’ chefs.”  Though the Labor Commissioner excluded back of the house employees from this list, it acknowledged that industry standards are likely to evolve over time.

At least one court has identified that standards have evolved.  In 2009, a California Court of Appeal disregarded the 2005 Opinion Letter and expanded the types of employees who may participate in a tip pool.  Specifically, the court held that back of the house kitchen staff may legally participate in a tip pool because they are part of the “chain of service.”  The court reasoned that a customer’s experience is not limited to employees the customer can see and that the amount a customer tips may depend on the customer’s satisfaction with the food.  This decision supports an employer’s ability to include kitchen staff in a valid tip pooling policy, especially when chefs or cooks are visible or interact with customers.

Employers should be aware that the Labor Commissioner has not yet revised its general guidance that only front of the house employees who provide direct table service can participate in a tip pool.  Given this apparent conflict in authority, restaurant employers who are risk averse should continue to limit tip pools to front of the house staff only.

The central theme in the guidelines for tip pools is that the pool be reasonable in terms of its funding and participation.  This is a case-by-case analysis based on the division of duties at each restaurant and should be analyzed carefully.  Though it is not a requirement, it is recommended that employers with tip pooling arrangements create a written tip pooling policy that is signed by each participant.

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Updates Regarding Compensable Pre-Hire and Onboarding Activities

by Fenton & Keller

March 13, 2026

Question:  I am planning to hire a new employee soon.  I have a few pre-employment activities planned for this new hire.  Should I pay this person for these types of activities?

Answer:  It depends.  Some activities must be paid as hours worked while others fall into the general unpaid onboarding duties.  Generally, activities related to assessing the individual’s qualifications or eligibility for employment are not paid.  However, activities that go beyond this and primarily benefit the employer must be paid as normal hours worked.  For example, if the employer is effectively shifting tasks that would otherwise occur on the employee’s first day of work to an earlier date, the time is likely compensable.

Given these general standards, employers should evaluate the compensability of each pre-hire and onboarding activity separately to ensure compliance.  The California rules governing pre-hire and onboarding activities were recently examined in the federal case of Martinho v. Amazon.com, Inc.  The court in Martinho analyzed the nature of various pre-employment activities and determined whether each should be paid as hours worked.

According to the Martinho court, examples of noncompensable pre-hire activities include submitting employment applications, undergoing drug testing, completing Form I-9 documentation, or participating in a background check.  Note that these activities occur before an employer decides to hire an employee.

The analysis is more nuanced once the hiring decision has been made.  This is because—at this point—the employer has already assessed the individual’s qualifications or eligibility for employment.  If an employer requires an individual who has already accepted a job offer to complete additional pre-employment tasks, there is an increased risk that these will be seen as benefiting the employer and therefore should be paid.  The ultimate question is whether the employer is advancing its own operational interests by shifting work that would otherwise occur during paid time.

Examples of compensable pre-hire activities may include taking a badge photo when the badge is required for daily facility access and timekeeping purposes.  In that scenario, the employer benefits by saving time on the employee’s first day of work, and the activity does not assess the employee’s qualifications.  Similarly, attending a welcome presentation, training, or setup activities that do not evaluate qualifications but instead provide job-related information may be compensable.  This is because they may be seen as advancing the onboarding process before the official start date.

The Martinho decision also affirmed that the actual substance of the activity determines whether it is paid or not.  Labeling an activity as “pre-hire” or “contingent” does not determine whether it is compensable.  Even if a job offer is conditioned upon completing a particular activity, the activity may still be compensable if it does not relate to assessing the individual’s qualifications or eligibility for employment.  Employers who do not compensate employees for certain pre-hire or onboarding activities may be exposed to claims for unpaid wages and related penalties.

The rules regarding whether pre-hire activities must be paid are complicated.  A case- by-case analysis is required to ensure compliance with California wage and hour law.  Employers with questions about pre-hire and onboarding practices are encouraged to connect with their employment counsel.

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2026 Minimum Wage and Salary

by Christopher J. Nannini

February 27, 2026

Question: As a business owner, I normally update my staff hourly wages at the beginning of each year.  Can you remind me of the minimum wage for 2026 and how it might impact non-hourly employees?

Answer: On January 1, 2026, California’s statewide minimum wage increased from $16.50 to $16.90 per hour.  The increase applies to most employers regardless of size.

With the increase to the minimum wage rate, employers also need to ensure that the annual salary for their exempt employees meets the minimum salary requirements for an exempt employee.  To satisfy the compensation prong of the exemption, most exempt employees must be paid a salary of at least two times the state minimum wage for full-time work.  For 2026, this translates to a minimum annual salary of $70,304 (calculated as $16.90 × 2 × 40 hours/week x 52 weeks/year).  Paying the salary threshold is only one part of the requirement.  Employees must also pass the duties test to avoid misclassification issues involving overtime and mandatory meal-and-rest periods.

Certain exemptions have their own compensation floors that do not track with the general minimum wage.  For example, California’s computer software employee exemption (a narrow exemption that depends heavily on the work actually performed) requires at least $58.85 per hour, or a minimum annual salary of $122,573.13, in 2026.  Similarly, the licensed physicians and surgeons exemption requires a minimum rate of $107.17 per hour as of January 1, 2026.  If an otherwise exempt employee’s salary falls below the minimum threshold, the exemption fails.  The employee must be reclassified as a nonexempt employee, requiring time tracking, overtime compensation, and compliance with all applicable meal and rest break regulations.

Industry-specific minimum wages can complicate the analysis.  Fast-food restaurants covered by the fast-food minimum wage law are subject to a separate, higher hourly minimum wage than the statewide rate.  Moreover, health care employers may be subject to a separate wage schedule depending on the type of facility and role, and the number of employees the employer employs.  If you operate in those industries (or contract into them), confirm which wage rules apply before you assume the statewide $16.90 rate controls your payroll planning.

Finally, keep in mind that many California cities and counties set local minimum wages above the state rate.  Unlike state law, many localities increase the minimum wage every July.  The rule is simple: an employer must pay the highest applicable minimum wage for the location where the employee works.  A list of California city and county minimum wage rates maintained by University of California Berkely is available here:  https://laborcenter.berkeley.edu/inventory-of-us-city-and-county-minimum-wage-ordinances/#s-2.

After you implement wage changes, California also requires timely written notice of pay-rate changes under Labor Code section 2810.5.  The Department of Industrial Relations publishes template notices and the updated minimum wage poster that employers must display in a visible, conspicuous location in the workplace.  The “Notice to Employee” can be downloaded for use https://www.dir.ca.gov/dlse/dlse-publications.htm.  The required minimum wage poster can be downloaded at https://www.dir.ca.gov/iwc/MW-2026.pdf.

California’s minimum wage rules are increasingly varied based on a variety of factors, including industry, employer size, and the location of the business and its employees.  Employers are encouraged to review their payroll records to ensure compliance with the minimum wage increase, and any impact it has on exempt employees.  with questions regarding the minimum wage increase or its impact on exempt employees should consult with their employment counsel.

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