Employment Due Diligence in a California Acquisition: What Kills Deal Value

What buyers examine first

• Independent contractor classification under the ABC test, especially for sales, delivery, and technical roles.
• Exempt classification against California's salary threshold and its quantitative duties test.
• Meal and rest period records, rounding practices, and the regular rate calculation where nondiscretionary bonuses exist.
• Wage statement format, since defects are strict-liability penalties across the workforce.
• Expense reimbursement for remote workers.
• Open PAGA notices, Labor Commissioner claims, CRD charges, and pending litigation or demand letters.

Equity and comp defects

Diligence routinely surfaces missing 83(b) elections, option grants issued without board approval, stale 409A valuations, promises of equity in offer letters that were never documented, and commission plans that do not state when a commission is earned.

These are cheap to fix in advance and expensive to fix during a signed transaction, because by then every fix requires the counterparty's consent.

Deal structure changes who owns the risk

In a stock purchase or merger, employment liabilities travel with the entity. In an asset purchase, the buyer has more room to structure around them, but successor liability doctrines and California's requirement to pay out terminated employees at closing still apply, and certain industries carry statutory retention obligations.

Either way, the exposure appears as specific indemnities, an escrow holdback, a purchase price reduction, or a representations and warranties insurance exclusion — the least favorable outcome, because it leaves the seller uninsured on exactly the identified issue.

The seller's pre-market cleanup

• Run a privileged classification and wage and hour audit and correct issues prospectively, with a documented decision about the look-back period.
• Reconcile the cap table, option grants, board consents, and 409A valuations.
• Confirm every employee and contractor signed a valid IP assignment — a gap here can threaten the core asset being sold.
• Update the handbook, offer letter, and commission plan templates to current California law.
• Assemble the employment diligence file before the buyer asks: org chart, comp data, policies, claim history, and I-9s.

Working with deal counsel

Employment review runs alongside corporate diligence rather than after it. Rainey Law P.C. performs seller-side cleanup and buy-side employment diligence for California transactions, and serves as ongoing outside general counsel once the deal closes.