Seyfarth Synopsis: The California Supreme Court held that an employer must prove that it made a reasonable attempt to decipher the requirements of the law governing minimum wages in order to avail itself of the good faith defense against liquidated damages for minimum wage violations. Additionally, an employee may raise a paid sick leave (PSL) claim for the first time when an employer appeals a Labor Commissioner decision, even if the claim was not asserted at the initial hearing. Iloff v. Cynthia LaPaille, et al.
The Facts
Laurance Iloff filed a claim against his former employer with California’s Labor Commissioner for a variety of wage claims after his employment was terminated. Iloff had worked on the employer’s properties and in return received free rent, though he received no other compensation. The matter went to a hearing before the Labor Commissioner (i.e., the “Berman process”). The employer argued that Iloff was an independent contractor, so he was not entitled to any relief. The Labor Commissioner found for Iloff, awarding him unpaid wages, liquidated damages, penalties, and interest. Iloff’s employer opted to appeal the decision to the Superior Court.
In the Superior Court, Iloff—now represented by counsel—added a PSL claim. After a bench trial, the Superior Court found that Iloff was entitled to unpaid wages, penalties, and interest, but declined to award Iloff liquidated damages for a minimum wage violation. Under California Labor Code section 1194.2(b), a court or the Labor Commissioner may refrain from awarding liquidated damages on a minimum wage claim if the employer “had reasonable grounds for believing” that its actions were lawful. In this case, the employer argued that the Parties had understood that Iloff would be paid via free rent but would not be paid wages, or otherwise treated as an employee. The Superior Court concluded this was sufficient for the employer’s good faith defense. The Superior Court also declined to award Iloff PSL penalties because he had raised the PSL claim for the first time on appeal. Iloff appealed and the Court of Appeal affirmed both rulings by the Superior Court.
The California Supreme Court Decision
On review, the California Supreme Court addressed two issues: (1) what showing must an employer make to establish the good faith defense to an award of liquidated damages for a minimum wage violation; and (2) may an employee raise a PSL claim for the first time in the context of an employer’s appeal of a Labor Commissioner ruling?
The California Supreme Court concluded that in order 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. Importantly, an employer cannot merely claim it was ignorant of the law in order to assert this defense.
The Court reasoned that its ruling aligned California law with existing interpretations under Federal minimum wage law. The Court emphasized that employers have a duty to take affirmative steps such as consulting legal resources, or seeking professional advice, in order to understand and comply with wage laws. The Court also clarified that only after establishing this defense may a trial court exercise discretion to reduce or deny liquidated damages.
With this understanding, the Court found that although the Parties had intended that Iloff would perform his services in exchange for rent, and that Iloff would not be considered an employee, their intention was insufficient to establish the good faith defense. In fact, the employer’s effort to establish the good faith defense actually proved that they were ignorant of the law, which, the Court concluded, was insufficient to prove good faith. Therefore, an award of liquidated damages was proper.
On the second issue, the Court concluded that an employee may raise a PSL claim for the first time at the trial court level in response to an employer’s appeal of a Labor Commissioner decision. The Court rejected the notion that such claims are limited to the administrative phase. It reached this conclusion by reasoning that the Berman process is part of the broader enforcement framework provided by the PSL, which seeks to make the Berman process available in addition to a private right of action. Therefore, Iloff had not waived his right to seek relief under the PSL simply because he had not raised the claim before the Labor Commissioner.
What Iloff Means for Employers
This decision reminds employers that they must be proactive in understanding and complying with wage and hour laws, particularly minimum wage requirements, in order to preserve the good faith defense to liquidated damages. Ignorance is not a defense. Additionally, employers must be prepared for the possibility that employees may raise new statutory claims—including PSL violations—during trial court proceedings following a decision by the Labor Commissioner.
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