Typically, employees who prove minimum wage violations are entitled to liquidated damages. Recently though, the California Supreme Court issued an opinion clarifying employers’ good-faith defense to that default rule — now employers must show that they made a reasonable attempt to determine the requirements of the law governing minimum wages. Proof that an employer was ignorant of the law is insufficient.
When an employer pays an employee less than the minimum wage, an employee can bring a claim in court or with the California Labor Commissioner, and recover the unpaid wages plus interest, as well as “liquidated damages” equal to the amount of unpaid wages plus interest, under Labor Code section 1194.2. The liquidated damages allowed under the Labor Code are essentially a penalty on top of the actual unpaid wages. If an employer acted in good faith, however, and shows that it had “reasonable grounds” for believing its conduct didn’t violate the Labor Code, the court or Labor Commissioner may — as a matter of discretion — refuse to award liquidated damages or reduce the amount of liquidated damages.
In this case, Laurance Iloff performed maintenance services for several years at the employer’s rental properties, including servicing the property’s structures, grounds and water system. The employer provided him with instructions, directions and approvals related to the work. They understood Iloff was an independent contractor when the arrangement began, under which the employer allowed Iloff to live rent-free in one of the houses but didn’t provide him with any other benefits or compensation for his services. This arrangement lasted several years.
The employer terminated the arrangement with Iloff, and he filed claims with the California Labor Commissioner, starting an administrative procedure to resolve wage disputes outside of a court action. During this process, the Labor Commissioner determined that Iloff was an employee — not an independent contractor — and as such, was entitled to unpaid wages, liquidated damages, penalties and interest.
California law allows a party to appeal the Labor Commissioner’s ruling to the superior court, which is what the employer did in this case. Applying California’s independent contractor test, the court agreed that Iloff was an employee, but the court declined to award liquidated damages based on the parties’ initial understanding of their arrangement, i.e., that it was an independent contractor relationship.
The California Supreme Court ultimately granted review to determine what employers must do to establish the good-faith defense to the default rule that employees who prove minimum wage violations are entitled to liquidated damages under Labor Code section 1194.2.
Based on analysis of the statutory context and Legislative history, the court ruled that, to establish the good-faith defense, an employer must show that it made a reasonable attempt to determine the requirements of the law governing minimum wages — proof that the employer was ignorant is not enough.
In this case, because Iloff’s employer didn’t show they made any attempt to determine what the law required and comply with those requirements, they didn’t prove the good-faith defense.
The employer argued that worker classification law was more unsettled during the time Iloff worked on the properties than it was at the time of the trial, and Iloff was the one who proposed the work arrangement. As such, the employer argued it had reasonable grounds to believe there was no violation.
While the California Supreme Court noted that these types of arguments are relevant to the good-faith defense, the employer must first show that they attempted to determine the requirements of the law. Here, the employer never attempted to determine whether their arrangement with Iloff complied with the law. As such, they can’t rely on after-the-fact arguments concerning the unsettled state of the law to prove they acted in good faith.
The court didn’t determine exactly how much employers must do when attempting to determine the applicable wage laws, but it did say that what constitutes a reasonable attempt will vary by context. For example, an individual employing a person on a casual, irregular basis may not need to undertake the same kind of effort as an established business with regular employees. Additionally, depending on the nature of the work arrangement, the court noted that a reasonable attempt to determine the legal requirements will not necessarily entail significant expense or effort, and even established businesses with regular employees may be able to satisfy this requirement without consulting legal counsel.
The big takeaway from this case is that employers need to make reasonable attempts to determine the requirements of wage laws applicable to their workers — even if the worker proposed the work arrangement. Not only is this important to the good-faith defense to the liquidated damages rule at issue in this case, but more importantly, employers should make efforts to determine applicable wage laws so that they stay in compliance with the law in the first place. Ideally, this ensures employees are properly compensated and avoids the lawsuit entirely, including the potential for liquidate damages, penalties and other costs of litigation.
James W. Ward, J.D., Employment Law Subject Matter Expert/Legal Writer and Editor, CalChamber
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