Is it Legal for Startups to Expect 12-Hour Days for Equity Compensation in California?

Startup culture is notorious for demanding long hours, often with the promise that equity compensation will make up for lower salaries and work-life balance sacrifices. Many California employees face this exact situation: being asked to work 12+ hour days while receiving stock options or other equity instead of higher cash compensation.

But is this practice legal under California law? This question involves multiple areas of employment law that directly impact your rights and financial future.

Understanding the Shah v. Skillz Case: Stock Options Are Not “Wages”

A pivotal 2024 California Court of Appeal decision, Shah v. Skillz Inc., determined that stock options do not constitute “wages” under California labor law.

California Labor Code section 200 defines wages as “all amounts for labor performed by employees of every description, whether the amount is fixed or ascertained by the standard of time, task, piece, commission basis or other method of calculation.”

The court ruled that stock options fail this definition because:

• Stock options are not “amounts” but contractual rights to purchase shares
• Their value isn’t “fixed or ascertainable” given stock price fluctuations
• They’re conditional upon both company performance and continued employment

In the Shah case, the employee accepted lower cash salary in exchange for stock options. When terminated for cause, he lost his ability to exercise approximately 60,000 vested options—options that would have been extremely valuable after the company’s IPO.

While Shah won $11.5 million (later adjusted to $6.7 million) on breach of contract claims, his wage-based claims for wrongful termination and retaliation were dismissed specifically because stock options aren’t legally wages.

This ruling is crucial for startup employees because it limits your ability to pursue certain wage-based claims when your compensation includes substantial equity.

California Overtime Laws Still Apply to Non-Exempt Employees

Even though stock options aren’t wages, California’s overtime laws still protect non-exempt employees regardless of equity arrangements.

Under California Labor Code section 510:

• Eight hours constitutes a standard workday
• Work beyond eight hours in one workday requires payment at 1.5× regular rate
• Work exceeding 12 hours in one workday requires payment at 2× regular rate
• Working seven consecutive days triggers 1.5× pay for the first eight hours, then 2× for additional hours

The California Labor Commissioner is clear: “California law requires that an employer pay overtime, whether authorized or not, at the rate of one and one-half times the employee’s regular rate of pay for all hours worked in excess of eight up to and including 12 hours in any workday, and for the first eight hours of work on the seventh consecutive day of work in a workweek, and double the employee’s regular rate of pay for all hours worked in excess of 12 in any workday and for all hours worked in excess of eight on the seventh consecutive day of work in a workweek.”

Are You Actually Exempt? The Critical Classification Question

Your rights to overtime pay depend entirely on whether you’re properly classified as exempt or non-exempt:

• Exempt employees: Generally executives, administrators, professionals, and certain computer professionals who meet specific salary and duty requirements. They don’t receive overtime regardless of hours worked.
• Non-exempt employees: All other workers who must receive overtime pay according to California law.

Many startup employees are incorrectly classified as exempt to avoid overtime obligations. This misclassification is particularly common in startups where job duties often cross traditional boundaries.

The ABC Test for Worker Classification

California uses the “ABC test” to determine if workers are employees or independent contractors. Under this test, a worker is presumed to be an employee unless the employer can prove all three of these conditions:

1. A) The worker is free from the control and direction of the hiring entity in performing the work, both under contract and in fact;
2. B) The worker performs work that is outside the usual course of the hiring entity’s business; and
3. C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

This strict test makes it difficult for companies to classify workers as independent contractors, who would otherwise be exempt from overtime protections.

Legal Problems With “Work Now, Get Paid (Maybe) Later”

Startup culture often normalizes trading present compensation for future potential gains. However, this arrangement presents several legal issues:

1. Minimum Wage and Overtime Requirements Cannot Be Waived

California employers must pay at least minimum wage ($16.00/hour in 2025) for all hours worked, plus applicable overtime for non-exempt employees, regardless of any equity arrangement.

California Labor Code section 1194 explicitly states that these rights cannot be waived:

“Notwithstanding any agreement to work for a lesser wage, any employee receiving less than the legal minimum wage or the legal overtime compensation applicable to the employee is entitled to recover in a civil action the unpaid balance of the full amount of this minimum wage or overtime compensation, including interest thereon, reasonable attorney’s fees, and costs of suit.”

2. Mandatory Rest and Meal Breaks

California requires specific breaks:

• 10-minute paid rest break for every 4 hours worked (or major fraction thereof)
• 30-minute unpaid meal break for shifts over 5 hours
• Second 30-minute meal period for shifts over 10 hours

Missing these breaks triggers penalties of one hour’s pay per day for each type of violation.

3. Equity Compensation Risks

Equity compensation carries substantial risks:

• Typically vests over 4 years with a 1-year “cliff” (no vesting until 12 months)
• Unvested equity is forfeited upon termination
• Vested options usually must be exercised within 90 days after termination
• Exercise often requires significant cash outlay for both purchase price and taxes
• Value is entirely dependent on company success and future liquidity events

Protecting Your Rights When Working for Equity

If you’re working extended hours with equity as a significant portion of your compensation, take these steps:

1. Verify Your Classification

Determine if you’re properly classified as exempt or non-exempt. Many startup employees are misclassified, particularly in engineering, design, marketing, or customer service roles.

2. Track Your Hours

Record all hours worked, especially if routinely exceeding eight hours daily. Note missed meal and rest breaks. This documentation is essential if you later need to pursue wage claims.

3. Review Equity Documentation

Carefully read all equity-related documents, focusing on:

• Total option grant and percentage ownership
• Vesting schedule and acceleration provisions
• Exercise price and timeframe for exercise after termination
• Class of shares and voting rights
• Anti-dilution protections

4. Negotiate Better Terms Before Accepting

For future positions, negotiate these equity provisions:

• Longer post-termination exercise periods (ideally 7-10 years)
• Accelerated vesting if terminated without cause
• Narrow definition of “cause” for termination
• Reduced exercise price or cashless exercise options
• Clear valuation methodology

5. Beware of Non-Compete Provisions

California strongly protects employee mobility and generally prohibits non-compete agreements. Be wary of employers trying to restrict your future employment options through expansive confidentiality provisions or equity-related restrictions.

When to Talk to an Employment Attorney

Consider getting legal advice if:

• You routinely work 8+ hour days without overtime pay
• Your employer uses equity as justification for below-market wages
• You’ve been terminated and lost access to your equity
• You believe you’re misclassified as exempt
• You’re being pressured to work excessive hours with promises about future equity value
• Your equity agreement contains terms you don’t understand

Long Hours Don’t Equal Legal Hours

While startup culture often glamorizes extreme working hours, California law provides strong protections for all employees that cannot be waived or replaced with equity promises. Stock options and other equity can be valuable additions to your compensation package, but they cannot legally substitute for minimum wage, overtime, and other fundamental employee rights.

At TONG LAW, we fight for employees throughout California who face wage violations, misclassification, and equity compensation issues. Our attorneys in Oakland and Sacramento have helped countless workers recover proper compensation and hold employers accountable.

If your startup is expecting excessive hours without proper compensation or substituting equity for basic wage protections, contact TONG LAW today to understand your rights and options.

This blog post is for informational purposes only and is not legal advice. Each employment situation is unique and requires individual analysis.