Ignorance of shifting wage laws is no excuse for violations

While it has long been the rule that a California employer must pay all final wages upon an employee's termination, it has become much harder to avoid substantial penalties for violating this rule. As the Court of Appeal put it recently, "ignorance of the law is no excuse." See Diaz v. Grill Concepts Services, Inc., 23 Cal. App. 5th 859 (2018).

Background

According to California's wage and hour laws, an employer that shorts a departed employee any required wages is liable for both the wage underpayment and, if the failure to pay was "willful," an additional amount up to 30 days' wages must be paid. See Cal. Lab. Code Sections 203(a). 1194(a). Courts have called this a "waiting time" penalty because it punishes the employer for effectively making the employee wait for his or her final paycheck. In this context, "willful" does not equal bad intent; it means merely that the employer knew what it was doing and intended to do it. See Kao v. Holiday, 12 Cal. App. 5th 947, 963 (2017); Barnhill v. Robert Saunders & Co., 125 Cal. App. 3d 1, 7 (1981).

This interpretation of "willful" in past cases left room for employers to avoid penalties if the failure to pay was due to uncertainty in the law or a mistaken belief, under good faith, that the wages were not owed. See Amaral v. Cintas Corp. No. 2, 163 Cal. App. 4th 1157, 1202 (2008); Road Sprinkler Fitters Local Union No. 669 v. G & G Fire Sprinklers, Inc., 102 Cal. App. 4th 765, 782 (2002).

New Wrinkle

However, the Court of Appeal tossed a wrench into the law when it decided the Diaz case. There, the court enforced waiting time penalties against an employer who violated a local living wage amendment by only halfheartedly investigating its suspicion that the wage had increased. This means that ignorance of a change in law is no excuse. Instead, employers must make reasonable efforts to investigate and remedy suspected violations or penalties may apply.

Negligent Investigation Can Lead to Liability

To determine whether the employer's actions triggered waiting time penalties, the Diaz court applied a negligence standard to the actions taken -- or, as in Diaz, not taken -- by the employer's human resources director and outside counsel. The court's decision provides some useful guideposts on what employers must do to comply with California's complex and constantly changing wage laws.

In Diaz, the employer's HR director suspected the employer was underpaying its employees after reading a newspaper article about the local living wage. The employer's outside counsel learned the living wage amendment was in process. Beyond that, all the HR director did was run search queries on the agency's website to see if the amended ordinance popped up, and outside counsel took no further action. In determining whether the employer made a good faith mistake in violating the law, the court held the employer's compliance efforts fell short of what a reasonable employer should have done. The court noted that the employer did not follow up with the local agency, nor did it contact any other businesses to see what they were paying employees, therefore implying that the company (and outside counsel) should have at least made these efforts.

Applying Diaz

The practical lessons from Diaz are easy to identify but harder to follow.

The case's holding may broadly implicate other wage violations stemming from employer policies or practices that have not kept pace with legal changes. Since waiting time penalties can trigger whenever the final paycheck is less than what is required, any wage payment violation warrants attention. Given the complex and rapidly shifting nature of California's wage laws, attorneys must be on high alert.

A few examples of recent changes to California's wage laws illustrate the necessity of keeping company practices current with the law. An employee misclassified as an independent contractor may be owed waiting time penalties based on unpaid overtime wages. Just recently, the California Supreme Court announced a new test for independent contractor classification. See Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018). Following Diaz, ignorance of how Dynamex might apply to an employer's independent contractors is no excuse for noncompliance. Rather, a reasonable attorney advising an employer on worker classification may need to, among other things, seek guidance from state agencies charged with regulating worker classification, or benchmark the employer's practices against similar employers.

Similarly, an employee bonus that is improperly incorporated into the employee's regular and overtime rates may trigger waiting time penalties if the final paycheck miscalculates overtime earned on the bonus. Three months ago, the California Supreme Court announced a new calculation for computing overtime from what it called "flat sum" bonuses. See Alvarado v. Dart Container Corp. of California, 4 Cal. 5th 542 (2018). Applying the principle announced in Diaz, ignorance of how to perform a "flat sum" bonus overtime calculation is no excuse for noncompliance. A reasonable attorney may need to obtain regulatory guidance on how the calculation applies to the employer's particular bonus, or at least ask other employers or counsel how they are applying Alvarado.

Conclusion

It is worth noting that the expectations for reasonable investigation of employment law changes in Diaz are the floor -- the minimum required -- and not the ceiling. Diaz critiqued the employer's efforts when the issue was simply applying a higher pay rate. Proper worker classification, flat sum bonus calculations and similar complex compliance concerns require much more attention from employment attorneys.

A regular audit of compensation policies and practices to ensure compliance with the latest laws is the best protection against wage law violations. At the very least, counsel cannot count on ignorance of California's evolving wage laws to excuse a violation or to avoid the waiting time penalties that can flow from a violation.