California Supreme Court raises bar for employers: “We didn’t know” is no defense

In a unanimous decision that strengthened California’s already robust worker protections laws, the state’s Supreme Court has made it harder for employers to avoid increased damages for minimum wage violations.

The ruling in Iloff v. LaPaille establishes that ignorance of the law is not a “good faith” defense to liquidated damages for minimum wage violations, and allows employees to raise some new claims on appeal.

What happened

Plaintiff Laurance Iloff performed maintenance work for a company that rented small homes and cabins. In lieu of wages, Mr. Iloff lived rent-free in one of the houses, receiving no other compensation, and the company classified him as an independent contractor. After the arrangement ended, Mr. Iloff filed a wage claim with the California Labor Commissioner, asserting that he was an employee, entitled to unpaid wages and liquidated damages. The Labor Commissioner agreed, and awarded him back pay, liquidated damages, and penalties. Lower courts then scaled back the award, finding a “good faith” misunderstanding of his status and barring new claims on appeal, but the California Supreme Court reversed – expanding employee protections and limiting employers’ defenses.

The Court’s decision

“Good faith” now requires a “reasonable attempt”

Under California Labor Code section 1194.2, employers found liable for violating the minimum wage law must pay the unpaid wages. They may also be required to pay an additional amount equal to the unpaid wages unless they can establish a “good faith” defense. This second component is known as liquidated damages and essentially doubles the amount that must be paid.

To avoid paying liquidated damages, it is not enough for an employer to claim that it was unaware of the law (or that the employee also misunderstood the law). In Iloff, the Court held that the employer must prove it made a “reasonable attempt” to understand and comply with its minimum wage obligations. According to the Court, accepting ignorance as a defense would remove any incentive for employers to investigate the law. This means an employer must make a reasonable and informed effort to determine what the law requires.

California versus federal standards

The Court’s ruling also compares California’s minimum wage liquidated damages provision with that of the federal Fair Labor Standards Act. California’s “good faith defense” language mirrors the language of the FLSA, which also has a good faith defense to liquidated damages if the employer can show that it had “reasonable grounds” for believing its conduct complied with the law. The California Court noted that, under the FLSA, neither ignorance of the law nor an employee’s agreement to be paid less than minimum wage is sufficient for an employer to establish the good faith defense.

In other words, under both California and federal law, ignorance of the law or a “mutual misunderstanding” is not a defense to a liquidated damages claim. Employers should be prepared to show their attempts to comply with the law whether the claim against them arises under California law or the FLSA.

Why this matters for your business

The Court’s message is clear: an effort to comply with the law is non-negotiable. The burden is now on employers to demonstrate that they took reasonable steps to follow the law. Employers cannot pay their workers less than the applicable minimum wage, even if the employee agrees to be paid less than minimum wage.

Although the Court did not provide a clear standard for what constitutes a “reasonable attempt,” employers should consider the following:

• Know your obligations. Research applicable wage and hour requirements, and attend workshops on wage and hour compliance. Consult with legal counsel.
• Conduct audits. Regularly review worker classifications (exempt versus non-exempt) and your payment practices.
• Provide Training. Ensure that your managers and supervisors are trained on California’s frequently changing laws.
• Update policies. Draft or maintain policies that reflect current California law.

The Iloff court sent a clear message: don’t guess. If you are unsure about your obligations under the California Labor Code, consult with legal counsel, and make documented efforts to investigate what your obligations may be under the state’s wage and hour laws.

If you have questions about how this decision may affect your business or would like guidance on ensuring compliance with California’s wage and hour laws, please contact any attorney in our Escondido, Los Angeles, Orange County, San Diego, or San Francisco offices.