A California Risk Advisory for Employers
Three forces are reshaping what it costs to employ people in California, and most companies are underestimating all three. Workers’ Compensation fraud is bleeding billions from the system. Employment Practices claims have hit record highs. And health benefits costs are climbing so fast that employers are rethinking how they fund coverage from the ground up. Here’s what HR leaders, CFOs, and CEOs need to know going into the second half of 2026.
Section 1: Workers’ Compensation
California’s workers’ compensation system is the most expensive in the country. High medical costs, aggressive applicant attorneys, and an increasingly complex fraud landscape push claim costs well above the national average. Employers who understand what is driving those costs can take meaningful steps to manage their exposure.
Workers’ compensation fraud in California is not a fringe issue. The National Insurance Crime Bureau estimates the state loses between $1 billion and $3 billion annually to WC fraud alone. The California Department of Insurance puts the broader insurance fraud cost, including premium fraud, at $15 billion per year, making it the second-largest economic crime in the state behind tax evasion.
Fraud comes from multiple directions and affects every employer in the form of higher premiums:
- Claimant fraud: employees exaggerate or fabricate injuries, or continue collecting benefits while working elsewhere
- Provider fraud: medical providers over-treat, over-prescribe, or bill for services never rendered, often in organized schemes
- Attorney-driven fraud: in 2025, CDI charged four individuals, including two attorneys, in a scheme targeting Spanish-speaking workers, selling over 1,100 manufactured claims for $550,000 in illegal referral fees
- Employer premium fraud: misclassifying employees or underreporting payroll to reduce premiums, which also exposes injured workers and creates unfair competitive advantages for bad actors
Psychiatric and stress-related claims are among the fastest-growing and most expensive in California workers comp. California is one of the few states where a purely psychological injury, with no physical component, can be fully compensable. Employees can claim a mental injury caused by work-related stress, and the burden falls on the employer to prove work was not the predominant cause.
- Psychiatric claims typically cost 3 to 5 times more than equivalent physical injury claims to resolve
- Remote and hybrid work has blurred the boundary between work and personal stress, making it harder to dispute causation
- Post-COVID comorbidities including anxiety, depression, and long-COVID conditions are extending claim durations and inflating disability ratings
- Managers can be named individually in stress claims tied directly to their leadership style or conduct
AB 5 continues to reshape how California employers must classify workers. A misclassified independent contractor is not covered by your workers’ compensation policy. If that person is injured on the job, the employer faces both the uninsured claim liability and significant regulatory penalties. California enforcement activity accelerated in 2024 and continues to grow.
Staffing agencies add another layer of complexity. If a temporary or contract worker is injured, disputes over which policy applies, yours or the agency’s, can delay treatment and generate litigation of their own.
Section 2: Employment Practices Liability (EPLI)
California is the most litigious employment law environment in the United States. No cap on FEHA damages, one-way attorney fee shifting, a three-year statute of limitations, and 11 new laws effective January 2025 create a legal landscape that is actively hostile to employers who are not paying close attention. Even well-intentioned companies face significant exposure.
PAGA stands for the Private Attorneys General Act. Most employers have heard the acronym. Far fewer understand exactly what it means for their day-to-day operations.
Why the penalty math is so dangerous:
- $100 per employee per pay period for initial violations
- $200 per employee per pay period for repeat or willful violations
- 100 employees on a weekly payroll equals up to $4 million in exposure for a single type of violation
- Average PAGA settlement exceeds $1 million; cases average nearly two years to resolve
- Record 10,098 PAGA notices were filed in 2025 despite 2024 reforms intended to reduce filings; plaintiff attorneys responded by concentrating on non-compliant employers
The most common PAGA triggers are operational, not malicious: a wage statement missing a required field, a meal break not documented as taken, or an expense not reimbursed on time. The penalties are identical regardless of intent.
Using AI tools in hiring, performance management, or layoff decisions introduces a category of employment discrimination liability that most HR teams have not yet fully accounted for. The core risk: an algorithm can produce discriminatory outcomes even when no human intended it, and California’s new automated decision-system regulations now place a burden on employers to demonstrate their tools were tested for bias.
In Mobley v. Workday, Inc. (N.D. California, May 2025), a federal judge certified a nationwide class action alleging that Workday’s AI screening tool disproportionately rejected applicants over 40, Black applicants, and disabled applicants. The critical finding for employers: you do not need to build the tool to be liable for what it produces. If it touches your hiring or termination decisions, you share the exposure.
Return-to-office mandates, without careful legal planning, are generating constructive discharge claims. California law treats a forced resignation, one where conditions became intolerable, as a termination. Employees hired as remote workers, employees with disabilities requiring accommodation, or employees on protected leave when a mandate is issued are the highest-risk population.
SB 497, effective January 2024, established a 90-day retaliation presumption. Any adverse action taken within 90 days of a complaint or accommodation request is legally presumed to be retaliatory unless the employer can prove otherwise with clear evidence. An RTO mandate issued shortly after a disability accommodation request is exactly the kind of fact pattern that produces six-figure settlements.
When companies reduce headcount to offset automation costs, the demographics of who is let go matter legally. Older, higher-paid employees disproportionately appear in AI-displacement layoffs. That pattern maps directly onto age discrimination exposure under FEHA and the federal ADEA.
Internal communications are often the deciding factor. A single email referencing wanting to bring in fresh energy or modernize the team became the centerpiece of a case that settled for $165,000 plus $70,000 in attorney fees before ever reaching trial.
- Before any reduction in force: run a statistical adverse impact analysis on who is being terminated by age, gender, race, and disability status
- OWBPA compliance: employees over 40 must receive 21-day consideration periods and 7-day revocation rights in any severance agreement waiving age claims
- Internal communications: train managers that employment decisions documented in writing become discoverable evidence
Section 3: Employee Benefits and Alternative Funding Solutions
Health benefits costs in California have increased 24% since 2022, vastly outpacing inflation and wage growth over the same period. Average annual family premiums now exceed $26,993 nationally, and California employers trend above that figure. With costs surpassing $17,000 per employee by 2026, the pressure is on HR & ownership to find sustainable solutions.
Nationally, 67% of covered workers are now in self-funded, level-funded plans or other non-traditionally fully employed plans. Among large employers, that number reaches 80%. California has historically lagged this trend, but mid-size employers are increasingly making the move as fully insured premiums are rising at unprecedented levels.
The real advantages of alternative funding solutions:
- Cost transparency: employers see actual claims data by diagnosis, provider, and utilization, which enables targeted intervention that fully insured employers cannot access
- Plan flexibility: self-funded plans under ERISA are not subject to California state benefit mandates, giving employers more control over plan design. Employers have more control over plan design while still under compliance with ACA regulations.
- Vendor choice: employers can select best-in-class point solutions for pharmacy, mental health, musculoskeletal, or other high-cost categories, such as wellness programs and employee perks.
- These advantages do require more administrative capacity as it relates to tracking claims, ACA fees, and mailing out notices that normally would be handled by the fully insured carrier.
Prescription drug costs are increasing 13% to 15% annually, and GLP-1 medications, the class that includes Ozempic and Wegovy, are driving a significant share of that growth. GLP-1 drugs now represent roughly 20% of total prescription drug costs, and total GLP-1 spend increased approximately 50% in 2025 alone.
For California employers, this creates a decision that sits at the intersection of cost management, talent retention, and legal risk. Covering GLP-1s for weight loss can add 2% to 5% to total pharmacy costs, and in high-utilization groups, the increase can reach 10% to 15%. Not covering them risks employee dissatisfaction and, in some cases, accommodation claims if weight is linked to a documented disability.
There are three cost drivers that are reshaping employer benefit strategies in California. Mental health utilization accelerated sharply post-pandemic and shows no signs of declining. Musculoskeletal conditions, the single largest claims category, are being addressed by a new generation of virtual and physical therapy point solutions. And chronic disease management, particularly for diabetes and cardiovascular disease, is emerging as the highest-leverage area for cost intervention when addressed proactively.
- 47% of California firms report that employees have a high or moderate level of concern about the affordability of their cost sharing (KFF 2025 California Health Benefits Survey)
- 36% of large California firms say prescription drug prices contributed greatly to premium increases
- Mental health parity compliance is under increased federal scrutiny; the 2024 MHPAEA final rule requires employers to demonstrate that mental health benefits are genuinely comparable to medical benefits
ABOUT C3 RISK & INSURANCE SERVICES
C3 is a San Diego-based, privately held insurance brokerage firm founded in 2017. With decades of industry experience, C3 takes a fresh, discovery-driven approach to risk—crafting proactive strategies to prevent loss and resolving complex claims quickly. Its innovative model and commitment to clients and employees have made C3 one of the fastest-growing insurance firms in the country. Learn more at c3insurance.com.
