The California Supreme Court recently issued an opinion that serves as an important reminder to employers: good intentions regarding compliance with wage laws are not enough to avoid liquidated damages for minimum wage violations. To rely on the statutory good-faith defense, an employer must affirmatively attempt to understand and comply with the law. Simply believing a work arrangement is lawful — or assuming the worker is not an employee — will not suffice.
In Iloff v. LaPaille, a property owner allowed a tenant to perform maintenance work in exchange for free rent. After the arrangement ended, the tenant filed a wage claim and prevailed before the Labor Commissioner. On appeal, the employer argued it should not owe liquidated damages under Labor Code section 1194.2 regarding the worker’s unpaid wages because both sides believed the arrangement was lawful and that the plaintiff would not be treated as an employee.
The Supreme Court disagreed. While the Court refrained from providing strict guidelines regarding the extent of the inquiry required to show an employer’s attempt to comply with wage laws, the Court held that the employer failed to show it made any attempt to determine whether minimum wage obligations applied. That failure alone defeated the good-faith defense.
Key Takeaways for Employers:
- Ignorance of the law is not good faith: The Court was explicit: employers cannot rely on their own misunderstanding as evidence of good faith. Good faith requires effort, not assumption.
- A “reasonable attempt” to understand the law is required and depends on context: Employers must show they took active, reasonable steps to determine what wage laws applied under the circumstances. The Court noted that “[a]n individual employing another person on a casual, irregular basis may not need to undertake the same kind of effort as an established business employing regular employees.”
- An agreement with the worker is irrelevant: Even if a worker voluntarily agrees to a particular pay arrangement or believes they are not an employee, the employer remains responsible for complying with minimum wage laws. The employee’s subjective belief cannot shield the employer from liquidated damages.
- Liquidated damages are the default rule: California law mandates liquidated damages equal to unpaid minimum wages unless the employer proves that it acted in good faith and had reasonable grounds for believing that the act or omission was not a violation of law. Without a showing of an employer’s proactive attempts to comply with wage laws, courts have no discretion to waive or reduce these damages.
The Iloff decision underscores the importance of documented compliance efforts. While the Court did not provide clear guidelines for employers, some examples of reasonable efforts may include:
- Consulting legal counsel regarding worker classification or compensation structure;
- Reviewing California Labor Code or DLSE guidance;
- Evaluating whether the work performed falls within the employer’s usual course of business;
- Seeking clarification from the Labor Commissioner or a qualified HR professional; and
- Regularly conducting training for managers and supervisors regarding California’s wage and hour laws.
The Court’s decision makes clear that the good-faith defense will not be available to employers who did not investigate their legal obligations. The burden is on the employer to show it took reasonable steps to comply with the law. Accordingly, being a proactive employer can be the difference between compliance and costly penalties.
