Hiring in Palo Alto: the rules for startups

California has some of the most employee-friendly laws in the country. Founders who have only worked in big companies are often surprised by how many rules apply to a team of three. The good news is that the core rules are written down by state and city agencies. The bad news is that mistakes, such as misclassifying a contractor or skipping a final paycheck, can cost far more than they would elsewhere.

This guide covers the rules a Palo Alto startup meets first: minimum wage, overtime exemptions, pay transparency, non-competes and the paperwork for a first hire. For where people look for work, see our guide to finding a tech job in Palo Alto.

Before your first hire

A company becomes an employer when it pays its first wages. The usual steps, in order:

1. Have an incorporated company and an EIN. Our guide to incorporating covers both.
2. Register with California's Employment Development Department as an employer once you pay wages above the state's threshold. EDD collects payroll taxes and handles unemployment insurance.
3. Get workers' compensation insurance. California requires it for every employer with even one employee.
4. Set up payroll, usually through a payroll provider that handles withholding and filings.
5. Complete Form I-9 for each new hire to verify work authorization. Report new hires to EDD.
6. Post required workplace notices, including Palo Alto's minimum wage bulletin. Remote teams usually share them electronically.

Our banking guide covers setting up the operating account your payroll will draw from.

Minimum wage in Palo Alto

Palo Alto sets its own minimum wage above the state rate. According to the city's minimum wage page:

The city's rate applies to employees who perform two or more hours of work a week in Palo Alto, including part-time workers and workers under 18. It covers only hours worked inside city limits. Tips and benefits do not count toward it. The rate rises each January 1 with a regional consumer price index, with increases capped at 5 percent. Employers must post the city's wage bulletin and keep payroll records for four years. Palo Alto contracts with the City of San Jose to handle complaints and compliance. Our business registration guide covers the city's other rules for employers with an office here.

Minimum wage matters to startups more than founders expect. Interns, part-time assistants, event staff and hourly technicians are all covered. Unpaid internships at for-profit companies are very hard to justify under state and federal law.

Salaried and exempt employees

Paying a salary does not by itself exempt an employee from overtime. In California, most exempt executive, administrative and professional employees must pass a duties test and earn at least twice the state minimum wage for full-time work. In 2026 that is $70,304 a year. The floor is based on the state minimum, not Palo Alto's higher rate.

Software engineers have a separate exemption. The Department of Industrial Relations sets a minimum rate each year for computer software employees. For 2026 it is $58.85 an hour, or $122,573.13 a year. The department has announced increases to $61.03 an hour and $127,108.34 a year from January 1, 2027. Nonexempt employees earn overtime after eight hours in a day as well as after 40 in a week. They are also entitled to meal and rest breaks.

Pay transparency

California's pay transparency law is in Labor Code Section 432.3. In general terms:

• Employers with 15 or more employees must include the pay scale in every job posting, including postings by recruiters and on job boards.
• Since January 1, 2026, the pay scale must be a good faith estimate of the salary or hourly range the employer reasonably expects to pay for the position upon hire, under amendments made by SB 642.
• Every employer must give an applicant the pay scale on reasonable request after an initial interview.
• Employees can ask for the pay scale for their own position.
• Employers must keep records of job titles and wage rate histories.
• Employers may not ask applicants about their salary history.

SB 642 also lengthened the time employees have to bring equal pay claims and widened the damages available. The state's Civil Rights Department publishes guidance on pay transparency and runs the pay data reporting program for employers with 100 or more employees.

Non-competes do not work here

California has refused to enforce employee non-compete agreements for well over a century. Business and Professions Code Section 16600 makes void any contract that restrains a person from engaging in a lawful profession, trade or business, with narrow exceptions such as the sale of a business. Many legal scholars credit this rule for the way engineers move freely between Silicon Valley companies.

Two laws that took effect on January 1, 2024 went further. One made it unlawful to enter into or try to enforce a void non-compete, even one signed outside California. The other required employers to notify current employees and certain former employees by February 14, 2024 that any non-compete clauses in their agreements were void.

What still protects a company:

• Trade secret law. Taking confidential information is still illegal.
• Confidentiality agreements. These remain enforceable when properly limited.
• Invention assignment agreements. Within the limits of Labor Code Section 2870, described in our patents and trademarks guide.

Courts have also treated many broad clauses that bar former employees from recruiting coworkers or soliciting customers as restraints under Section 16600. Have a lawyer review any restrictive clause before you use it.

Employees or contractors

Startups love contractors for flexibility. California is strict about the label. Under the ABC test written into the Labor Code, a worker is generally an employee unless the company shows all three: the worker is free from its control, the work is outside the usual course of its business and the worker is independently established in that trade. Some professions have exceptions. Misclassification can bring back pay, taxes and penalties. When in doubt, ask counsel before you sign a contractor agreement.

Other rules worth knowing

• Paid sick leave. California requires employers to provide at least 40 hours or five days of paid sick leave a year.
• Harassment prevention training. Employers with five or more employees, counting contractors in some cases, must provide training to supervisors and staff.
• Final pay. An employee who is fired must be paid all final wages immediately, including accrued vacation.
• Offer letters. State wage notices must tell new nonexempt employees their pay rate and payday.
• Equity. Stock options are offered under state securities exemptions and federal tax rules. Our equity guide explains the basics.
• Visas. Sponsoring a worker brings extra duties. See our founder visas guide.

The official places to check are the Department of Industrial Relations for wages and hours, EDD for payroll taxes, the Civil Rights Department for discrimination and pay data rules and the city for local wages.

Frequently asked questions