California Supreme Court: ‘Good Faith’ Defense to Minimum Wage Liquidated Damages Must Show Attempt to Understand Law

The California Supreme Court recently held in Iloff v. LaPaille that an employer seeking to assert the good-faith defense to avoid mandated liquidated damages for failing to pay an employee the minimum wages must show that they made some affirmative efforts to understand what the law requires.

California Labor Code § 1194.2(a) states that an employee “shall be entitled to recover liquidated damages in an amount equal to the [minimum] wages unlawfully unpaid and interest thereon,” but under California Labor Code § 1194.2(b) a court or the Labor Commissioner may refrain from awarding liquidated damages if the employer “had reasonable grounds for believing” that its actions were lawful.

PROCEDURAL HISTORY

The plaintiff, Laurance Iloff, brought claims for renumeration of unpaid wages after he worked on company properties in exchange for free rent, but no wages. The defendants argued that Iloff was operating as an independent contractor and thus was not entitled to relief.

Following a bench trial, the Superior Court ruled that Iloff was an employee, however, the court concluded that Iloff was not entitled to liquidated damages for a minimum wage violation because the defendants had acted in “good faith” and had “reasonable grounds for believing” that they were complying with the law, citing the agreement between the parties, which provided that Iloff would not be treated as an employee and would be provided free rent and no wages.

The court of appeal affirmed the Superior Court judgment, but the state Supreme Court reversed. The court found the good-faith defense could not be established because “the employers do not claim to have made any attempt to determine the requirements of the law governing compensation for Iloff’s services to their business.”

GOOD-FAITH DEFENSE

In a unanimous opinion, the California Supreme Court held that “to establish the good faith defense[] an employer must show that it made an attempt to determine what the law required.” Employers therefore may not avail themselves of the good-faith defense based merely on ignorance of the law.

In reaching this conclusion the court relied on the language of the statute—which mandates an award of liquidated damages whenever a minimum wage violation has been established—in finding that “[i]t would be contrary to” the legislative intent of the minimum wage law to “allow[] courts to relieve an employer of liability for liquidated damages without showing that it had made a reasonable attempt to determine the requirements of the law governing minimum wages and a good faith effort to comply with it.”

The court also relied on the Fair Labor Standards Act (FLSA) good-faith defense to liquidated damages, which requires that “the act or omission giving rise to such action was in good faith and that he had reasonable grounds for believing that” it was not an FLSA violation.

The court explained that employers bear the burden of establishing that they made such reasonable attempts and good-faith efforts, but expressly left open the issue of the “extent of the inquiry that is generally required” to prove the good-faith defense.

The court noted that “the form and extent of the required attempt is context dependent” and arguments regarding challenges of complying with unsettled or rapidly evolving areas of the law—as with the test for independent contractor misclassification at issue in Iloff—“may be relevant to the good faith defense.” The court[1] rejected the argument that this interpretation “places too great a burden” on employers:

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. Depending on the nature of the work arrangement at issue, a reasonable attempt to determine the requirements of the law will not necessarily entail significant effort or expense. In many cases, even established businesses with regular employees may be able to satisfy this requirement without consulting legal counsel.

KEY TAKEAWAYS

The Iloff decision demonstrates that employers must take some affirmative steps to determine what California’s minimum wage law requires, including exceptions to the law. What is considered a “reasonable attempt to determine the requirements of the law” will be decided in future cases.

The Iloff decision did not address whether the standard for the minimum wage defense to liquidated damages will apply to other wage and hour laws with “good-faith” defenses.