Proposition 65 Small Business Exemption: Does the Under-10 Employee Rule Protect You in California?

Proposition 65 strikes fear into the hearts of business owners across the country. The law requires mandatory warning labels on products containing chemicals known to the state of California to cause cancer or reproductive toxicity. However, the law includes a vital lifeline for small startups and "mom-and-pop" shops: The Small Business Exemption. Under Cal. Health & Safety Code § 25249.11(b), a business employing fewer than 10 employees is completely exempt from the warning requirements and the massive fines associated with Prop 65 lawsuits. While this sounds simple, plaintiff attorneys make their living by aggressively challenging this exemption. Whether your business is based in Sacramento, Los Angeles, or entirely outside of California, calculating your employee count properly is a legal minefield. Furthermore, relying on this exemption can still backfire if your products end up on the shelves of larger retailers. This guide clarifies the under-10 rule. Always check our directory to find a skilled defense attorney to help shield your small business.

Calculating the 10-Employee Threshold

Bounty hunter law firms will not simply take your word that you are a small business. They will demand payroll records, tax filings, and corporate documents to prove you cross the threshold. Here is how California courts calculate your workforce.

Part-Time vs. Full-Time Workers

One of the most dangerous traps for small businesses is assuming that only full-time employees count. Under Prop 65 regulations, every single person on your payroll counts as an employee, regardless of the hours they work. If you have two full-time managers and eight high school students working five hours a week on weekends, you have 10 employees. You are no longer exempt, and you must provide clear and reasonable warnings on your products.

Out-of-State Workers and Corporate Structures

The 10-employee limit is not restricted to workers residing in California. If your company is headquartered in Texas with 15 employees, but you sell products online to a customer in San Diego, you are subject to Prop 65. All 15 of your Texas employees count toward the threshold. Additionally, if your small business is a subsidiary of a much larger parent corporation, courts may legally combine the employee counts of both entities to eliminate your exemption.

Independent Contractors

Generally, true independent contractors (1099 workers) do not count toward the 10-employee threshold. However, California law-specifically the strict "ABC test" for worker classification-makes it very difficult to legally classify someone as a contractor. If a Prop 65 plaintiff proves that your "contractors" are actually misclassified employees, they will be added to your total count, potentially pushing you over the limit and destroying your defense.

The Retailer Trap: When Exempt Businesses Face Liability

Even if your company legitimately has only three employees, you are not entirely safe if you sell your products wholesale to larger retailers. This is known as the "Retailer Trap."

Indemnification Demands from Large California Retailers

Imagine your three-person soap company sells its products to a massive supermarket chain in San Francisco that employs 5,000 people. If a bounty hunter finds toxic chemicals in your soap, they cannot sue you directly because of your small business exemption. Instead, they will sue the giant supermarket. The supermarket will then look at the vendor contract you signed. Almost all commercial vendor agreements contain an "indemnification clause." This clause legally forces your small business to pay for all of the supermarket's legal defense costs and Prop 65 settlements. In this scenario, your small business exemption is practically useless because you are paying the penalty indirectly.

How Much Does it Cost to Fight Prop 65 Claims?

Defending your small business exemption requires legal firepower. If a plaintiff challenges your status, you will incur costs proving your employee count.

How Long Does the Defense Process Take?

If you receive a 60-Day Notice of Violation and your attorney responds immediately with ironclad proof (like a sworn declaration and W-2 records) that you have fewer than 10 employees, the bounty hunter may drop the case within a few weeks. However, if they suspect you are hiding employees through shell companies, they may file a lawsuit in a local Superior Court to force discovery, dragging the stressful process out for 6 to 12 months.

Frequently Asked Questions (FAQ)