Good Faith Requires Action: The New Standard for Employer Defense
[Law Clerk Molly Thorpe contributed.]
As defense attorneys, we often encounter matters where an employer’s good-faith mistake gives rise to wage and hour litigation. While ignorance of the law generally provides no defense, a good-faith mistake, historically speaking, might not result in additional penalties.
The California Supreme Court clarified when good faith may create a defense to penalties in Iloff v. LaPaille (18 Cal.5th 551).
In Iloff, defendants allowed plaintiff, a maintenance worker, to live rent-free in one of their properties, but did not provide any other benefits or compensation.
After the employer terminated his employment, Iloff filed a claim for unpaid wages with the Labor Commissioner. While the defendants claimed he was an independent contractor, the Labor Commissioner determined plaintiff was an employee – awarding Iloff unpaid wages, liquidated damages, penalties, and interest.
The defendants appealed, and Iloff then sought an additional claim for penalties under California’s Paid Sick Leave law. Both the trial court and the Court of Appeal agreed plaintiff was an employee, but ruled in the defendants’ favor on two key issues:
(1) no liquidated damages were owed because defendants established the good faith defense; the parties intended and expected that plaintiff would perform his services in exchange for free rent and that he would not be paid wages or otherwise treated as an employee; and
(2) plaintiff could not raise the paid sick leave claim for the first time on appeal.
The California Supreme Court reversed both of these lower court rulings.
Invoking Good Faith Defenses and Reasonable Efforts
Per the Supreme Court, to establish a good faith defense, the employer must demonstrate “it made an attempt to determine what the law required” and conform to it.
If the employer sufficiently demonstrates this, the court may reduce or deny liquidated damages.
While not providing guidance on what exactly constitutes a “reasonable attempt to determine the requirements of the law,” the Court noted it will vary by context:
“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.”
Paid Sick Leave Claims on Appeal
The California Supreme Court held that an employee can add a new claim for paid sick leave penalties when an employer appeals a Labor Commissioner ruling.
While the Paid Sick Leave Law does not explicitly permit enforcement in the context of an appeal from a Labor Commissioner hearing, the Court concluded that lawmakers did not intend to “deprive employees of their right to raise” these claims on appeal.
The Court noted that barring such claims would be contrary to both the legislative intent and public policy, highlighting worker-protective interpretation of the Labor Code.
What’s Next?
We encourage employers to audit their records and practices to confirm wage and hour and sick leave compliance. As we previously wrote in PAGA: It’s Audit Time, “Being proactive now can save you time, money, and headaches later.”
The Supreme Court’s Iloff ruling serves as a reminder that regular employer audits may not only reduce liability but can also constitute a viable defense against liquidated damages.
Sue M. Bendavid and Tal Burnovski Yeyni are California Employment Defense Attorneys. Molly K. Thorpe is a law clerk and recent graduate of Loyola Law School.