Iloff v. LaPaille

Facts

Two Labor Code regimes frame the case. First, Labor Code section 1194.2, subdivision (a) states a default rule: when a court finds an employee is owed unpaid minimum wages, it must award “liquidated damages in an amount equal to the wages unlawfully unpaid and interest thereon.” Subdivision (b) supplies the escape valve — if the employer proves “that the act or omission giving rise to the action was in good faith and that the employer had reasonable grounds for believing that the act or omission was not a violation,” the court has discretion to deny or reduce the award. (Iloff, supra, 18 Cal.5th at pp. 561–562.) Second, the Healthy Workplaces, Healthy Families Act of 2014 (§ 245 et seq., the Paid Sick Leave law) is enforced by the Labor Commissioner “through the procedures set forth in Sections 98, 98.3, 98.7, 98.74, or 1197.1” (§ 248.5, subd. (a)) — a list that names the Berman hearing statute (§ 98) but not the Berman appeal statute (§ 98.2). (Id. at pp. 568–569.)

Laurance Iloff lived and worked in Bridgeville, an unincorporated Humboldt County settlement owned by Bridgeville Properties, Inc. and managed by Cynthia LaPaille. For several years Iloff maintained the property’s structures, grounds, and water system under LaPaille’s instructions, directions, and approvals. The arrangement was informal: rent-free housing, no other compensation, no benefits. (Iloff, supra, 18 Cal.5th at p. 559.) When the employers ended the arrangement, Iloff filed wage claims with the Labor Commissioner, invoking the administrative “Berman process.” (Ibid.) The employers contended he was an independent contractor; the Labor Commissioner found him an employee and awarded unpaid wages, liquidated damages, penalties, and interest. (Ibid.)

The employers appealed to the superior court for de novo review under section 98.2, subdivision (a). Iloff — now represented by a Labor Commissioner attorney under section 98.4 — filed a notice of claims reasserting his wage claims and adding new ones, including penalties under the Paid Sick Leave law. (Iloff, supra, 18 Cal.5th at p. 559.) After a bench trial, the superior court agreed Iloff was an employee under the Dynamex framework: he was not free from the employers’ control and direction, and his work was within the usual course of their business. (Ibid., citing Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903, 964.)

But the trial court ruled for the employers on the two issues that reached the Supreme Court. It denied liquidated damages, finding the employers acted in “good faith” with “reasonable grounds” because both sides intended and expected the work-for-rent exchange and no one believed, before the termination, that Iloff would be paid wages or treated as an employee. And it rejected the Paid Sick Leave claim on the ground that the statute did not authorize raising such penalties in the employers’ Berman appeal. (Iloff, supra, 18 Cal.5th at p. 560.)

Procedural history

The Court of Appeal (First District) affirmed on both points. (Seviour-Iloff v. LaPaille (2022) 80 Cal.App.5th 427, 447–451.) On liquidated damages, it distinguished the federal Fair Labor Standards Act authorities as serving different purposes — reasoning that because prejudgment interest is available under the Labor Code but not the FLSA, Labor Code liquidated damages “serve as a penalty” rather than compensate for delay, making FLSA case law uninstructive — and read section 1194.2(b)’s “to the satisfaction of the court” language as conferring “considerable latitude” on the trial court. (Iloff, supra, 18 Cal.5th at pp. 564–565, quoting Seviour-Iloff, at pp. 447–449.) On sick leave, it inferred from section 248.5, subdivision (a)’s omission of section 98.2 that the Legislature barred Paid Sick Leave claims in Berman appeals, concluding “there is no private right of action to seek administrative penalties under section 248.5.” (Id. at pp. 569, 573, quoting Seviour-Iloff, at p. 451.) The Supreme Court granted review limited to the two issues and reversed, unanimously. (Id. at p. 560 & fn. 2.)

One procedural curiosity: after Iloff filed his opening brief on the merits, the employers declined to respond to his arguments, filing instead a short brief asking the Court to withhold jurisdiction from the lower courts over an anticipated fee motion under section 98.2, subdivision (c). The Court denied the request, leaving the employers to oppose the fee motion on remand. (Iloff, supra, 18 Cal.5th at p. 560, fn. 2.)

Issue

First: may an employer establish the good-faith defense to mandatory liquidated damages under section 1194.2, subdivision (b) without showing that it attempted to determine what the law governing minimum wages requires — for instance, by proving the parties mutually intended an unpaid, work-for-rent arrangement? (Iloff, supra, 18 Cal.5th at p. 561.) Second: may a superior court hearing an employer’s de novo Berman appeal under section 98.2 consider a Paid Sick Leave law claim the employee raises for the first time in that proceeding, given that section 248.5, subdivision (a) lists section 98 but not section 98.2 among the law’s enforcement procedures? (Id. at p. 568.)

Holding

Reasoning

Interpretive posture. Review was de novo, and the Court invoked the settled directive that the Labor Code is liberally construed “to protect employees from abuse and to promote safe and healthy working conditions.” (Iloff, supra, 18 Cal.5th at pp. 560–561, citing Augustus v. ABM Security Services, Inc. (2016) 2 Cal.5th 257, 262.)

The statutory structure makes liquidated damages the norm. Section 1194.2, subdivision (a) mandates the award once a minimum-wage violation is found; subdivision (b) places the burden of the defense on the employer. (Iloff, supra, 18 Cal.5th at pp. 561–562.) The neighboring provision, section 1194, subdivision (a), entitles an employee to recover the unpaid balance “[n]otwithstanding any agreement to work for a lesser wage” — which, the Court reasoned, signals legislative intent that employers remain liable for liquidated damages “even when their employees have agreed to work for less than the minimum wage.” Reading the good-faith defense to excuse an employer that never tried to learn the law “would be contrary to this apparent intent.” (Id. at p. 562.)

Legislative history: deterrence would collapse if ignorance were a defense. The liquidated-damages provision arrived in a 1991 enforcement bill (Sen. Bill No. 955) meant to strengthen public and private enforcement of the minimum wage; its sponsors called liquidated damages a “disincentive[] to [the] violation of minimum wage laws.” (Iloff, supra, 18 Cal.5th at pp. 562–563.) “Liquidated damages would be much less effective as an enforcement tool and a means of deterring minimum wage violations if an employer could evade them merely by showing that it was ignorant of the law.” (Id. at p. 563.)

The FLSA model controls the defense’s shape. The legislative history shows section 1194.2’s good-faith language “conform[s]” to the FLSA’s (29 U.S.C. §§ 216(b), 260), and federal courts have long required employers to take “active steps to ascertain the dictates of the FLSA” and to “act[] to comply with them” — ignorance alone never suffices, employee acquiescence does not prove good faith, and a mutually agreed unlawful pay arrangement is insufficient. (Iloff, supra, 18 Cal.5th at pp. 563–564, citing, inter alia, Herman v. RSR Security Services Ltd. (2d Cir. 1999) 172 F.3d 132, 142, Local 246 Utility Workers Union of America v. Southern California Edison Co. (9th Cir. 1996) 83 F.3d 292, 298, and Alvarez v. IBP, Inc. (9th Cir. 2003) 339 F.3d 894, 910.) Federal interpretations of similar federal language are “helpful in interpreting the reach of” the California statute. (Id. at p. 564, quoting Raines v. U.S. Healthworks Medical Group (2023) 15 Cal.5th 268, 282.)

The Court of Appeal’s penalty/compensation dichotomy was false. Liquidated damages under section 1194.2 both punish and compensate: they are “in effect a penalty” (Martinez v. Combs (2010) 49 Cal.4th 35, 48, fn. 8) yet also “truly ‘damages’” paid to employees for harms “too obscure and difficult of proof for estimate.” (Iloff, supra, 18 Cal.5th at p. 565, quoting Overnight Motor Co. v. Missel (1942) 316 U.S. 572, 583–584.) That California adds prejudgment interest merely reflects the Labor Code’s greater protectiveness (Mendiola v. CPS Security Solutions, Inc. (2015) 60 Cal.4th 833, 843); it does not widen the defense beyond its FLSA model. (Ibid.)

“To the satisfaction of the court” allocates the question to the judge — it is not a discretion grant. Rejecting the Court of Appeal’s “considerable latitude” reading, the Court explained the phrase “simply indicates that an award of liquidated damages ‘is to be granted, or denied, by the court, as opposed to the jury.’” (Iloff, supra, 18 Cal.5th at pp. 565–566, quoting McClanahan v. Mathews (6th Cir. 1971) 440 F.2d 320, 322.) Discretion to deny or reduce arises only after the employer carries its burden; absent that showing, “the court must award liquidated damages.” (Id. at p. 566.)

Application: no attempt, no defense. The employers never claimed to have made any attempt to determine the law’s requirements. Their arguments that worker-classification law was unsettled during Iloff’s employment, and that Iloff himself proposed the work-for-rent arrangement, could not substitute: “Having made no attempt to determine the requirements of the law, the employers cannot rely on arguments concerning the unsettled state of that law to prove that they acted in good faith in failing to comply with its requirements.” (Iloff, supra, 18 Cal.5th at pp. 566–567.) The trial court’s mutual-expectation findings “establish that the employers did not understand that they were required to pay Iloff the minimum wage, but ‘ignorance alone’ does not prove good faith.” (Id. at pp. 567–568, quoting Marshall v. Brunner (3d Cir. 1982) 668 F.2d 748, 753.) The Court tempered the rule’s burden: what is “reasonable” is context-dependent; casual or irregular employment may demand less inquiry than an established business, and “[i]n many cases, even established businesses with regular employees may be able to satisfy this requirement without consulting legal counsel.” (Id. at p. 567.)

Sick leave: the statutory list initiates actions; it does not amputate appeals. Turning to section 248.5, the Court agreed that the Berman process is an authorized enforcement avenue (the list cites § 98) but rejected the negative inference from section 98.2’s absence. The Paid Sick Leave law declares its provisions “in addition to and independent of any other rights, remedies, or procedures available under any other law” (§ 245, subd. (b)) and its own procedures “cumulative” (§ 248.5, subd. (g)). (Iloff, supra, 18 Cal.5th at pp. 568–570.) The listed provisions all describe ways to initiate enforcement; section 98.2 “does not provide a procedure for initiating an enforcement action; instead, it only provides for an appeal” from the section 98 process already on the list. (Id. at p. 570.) Once a Berman hearing occurs, appeal rights follow automatically (Post v. Palo/Haklar & Associates (2000) 23 Cal.4th 942, 947); no separate citation was needed. (Id. at p. 571.)

The nullification problem. Because a Berman appeal “nullifies” the Labor Commissioner’s decision and produces a new trial (Arias v. Kardoulias (2012) 207 Cal.App.4th 1429, 1435), the Court of Appeal’s reading would let an employer erase a meritorious sick-leave award simply by appealing — leaving the employee “without any avenue to personally pursue their claims.” (Iloff, supra, 18 Cal.5th at p. 571.) Nothing in the 2020 amendment’s history (Assem. Bill No. 1867) suggested such an intent; and the Legislature is presumed to have known Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094 — which confirmed trial-court discretion to entertain additional related claims in Berman appeals — when it drafted against that backdrop. (Id. at pp. 572–573.) Omitting one citation from a list, “without any discussion in the legislative history,” would be “an exceedingly subtle way” to strip employees of that right. (Id. at p. 573.)

A Berman appeal is not a “private right of action.” The Court of Appeal had conflated the two. A Berman appeal is “a procedure for de novo reconsideration of the Labor Commissioner’s ruling,” with an employer bond requirement and Labor Commissioner representation for unrepresented employees — not a direct civil suit. (Iloff, supra, 18 Cal.5th at p. 573.) With no private right of action under the Paid Sick Leave law, the Berman process is the employee’s “sole avenue” for personal enforcement (citing Wood v. Kaiser Foundation Hospitals (2023) 88 Cal.App.5th 742, 757), and PAGA is no substitute: a PAGA plaintiff sues as the state’s proxy and “may recover only civil penalties,” not the relief the Berman process affords. (Id. at pp. 573–574 & fn. 5, citing Arias v. Superior Court (2009) 46 Cal.4th 969, 986.) Requiring the Labor Commissioner or Attorney General to file a separate lawsuit would serve no evident interest and would contradict “section 98’s basic promise of providing employees with an expeditious and accessible method for resolving their claims.” (Id. at pp. 574–575.)

Significance

Iloff completes a two-case reconstruction of “good faith” in California wage enforcement. Naranjo v. Spectrum Security Services, Inc. (2024) 15 Cal.5th 1056 held that an objectively reasonable, good-faith belief that pay was proper defeats the “willfulness” and “knowing and intentional” predicates for waiting-time and wage-statement penalties (see our analysis of the good-faith defense after Naranjo); Iloff now defines what good faith is for section 1194.2 — and it is an affirmative diligence standard, not a state of mind. After Iloff, the two defenses share a floor: an employer that never investigated its obligations has neither a Naranjo belief that is objectively reasonable nor an Iloff attempt that is reasonable under the circumstances. Plaintiffs should brief them together; employers can no longer treat subjective innocence as a shield in either posture.

The decision’s practical center of gravity is misclassification. The trial court’s findings here — mutual expectation of unpaid, in-kind work — are the archetype of informal arrangements (property caretakers, family-adjacent workers, “volunteers,” barter deals) that generate minimum-wage exposure. Iloff makes the liquidated-damages award in such cases close to automatic: the very informality that produced the arrangement usually means no one consulted wage-and-hour requirements, and the defense now fails on that ground alone. Doubling of the wage recovery becomes the default settlement baseline.

On the sick-leave holding, Iloff is the Supreme Court’s first significant construction of the Healthy Workplaces, Healthy Families Act’s enforcement architecture. It confirms three propositions with reach beyond the facts: the Act’s remedies are cumulative and independent (§§ 245, subd. (b), 248.5, subd. (g)); the Berman process — including the appeal stage under Murphy — is fully available for sick-leave penalties; and there is still no private right of action, which preserves Wood‘s PAGA pathway as the only representative vehicle. (Iloff, supra, 18 Cal.5th at pp. 570, 573–575 & fn. 5.) For the plaintiff-side practitioner, the sequencing lesson is concrete: when an employer appeals a Berman award, treat the de novo trial as an opportunity to enlarge the case — audit the file for sick-leave violations and every related claim Murphy discretion will bear, because the employer’s appeal reopens everything and section 98.2, subdivision (c)’s one-way fee provision prices that risk to the employer.

Key quotes

“While the form and extent of the required attempt is context dependent, the burden is on the employer to show it made an attempt to determine what the law required that was reasonable under the circumstances and a good faith effort to comply with the requirements of the law.” (Iloff, supra, 18 Cal.5th at p. 561.)

“Liquidated damages would be much less effective as an enforcement tool and a means of deterring minimum wage violations if an employer could evade them merely by showing that it was ignorant of the law.” (Id. at p. 563.)

“Only when an employer has established the defense does a court have discretion to deny a request for liquidated damages or to award a lower amount of liquidated damages than would otherwise be required by the Labor Code’s default rule.” (Id. at p. 566.)

“If the ‘mere assumption’ that minimum wage law was inapplicable were sufficient to prove good faith, ‘no employer would have any incentive to educate itself and proactively conform to governing labor law.’” (Id. at p. 567, quoting McFeeley v. Jackson Street Entertainment, LLC (4th Cir. 2016) 825 F.3d 235, 245.)

“Omitting a citation from a long list of other citations — without any discussion in the legislative history — would be an exceedingly subtle way for the Legislature to indicate an intent to preclude employees from pursuing Paid Sick Leave law claims in Berman appeals, as would otherwise be their right under Murphy.” (Id. at p. 573.)

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Practice pointer

Open questions

The Court expressly declined to “determine today the extent of the inquiry that is generally required,” holding only that the reasonable attempt “will vary by context” — leaving for case-by-case development what suffices for a household employer, a small business, or a sophisticated enterprise, and when reliance on lay sources rather than counsel is enough. (Iloff, supra, 18 Cal.5th at p. 567.) It reserved whether, once a defense is established, the discretionary reduction stage may weigh equities such as the employee having proposed the arrangement or alleged misconduct — expressly stating “[w]e express no view” on whether the employers’ theft allegations could bear on a reduced award. (Id. at p. 566; id. at p. 567, fn. 4.) The decision also leaves intact the absence of a Paid Sick Leave private right of action, keeping pressure on the Wood PAGA route and on Labor Commissioner capacity (id. at pp. 573–574 & fn. 5) — and it does not resolve how its diligence standard interacts with the reformed PAGA’s penalty-mitigation provisions for employers that take “all reasonable steps” to comply, an argument both sides will now make by analogy.