Employers' Ignorance of the Law Does Not Qualify as an Inadvertent Mistake

March 3, 2011  |  From HRCalifornia Extra

Employers are keenly aware that many Labor Code violations come with a penalty assessment, and very few violations leave much wiggle room for mistake or error. However, Labor Code Section 226.3, which imposes a penalty for failing to provide itemized wage statements, does provide employers a reprieve from the penalty if the Labor Commissioner determines that the noncompliance was "inadvertent." As with most statutory provisions, the Labor Code provides no guidance on what "inadvertent" means, leaving it up to the courts to decide what the term means.

This situation played out in a recent case where the court determined that the word "inadvertent" did not mean ignorance of the law, even if the ignorance was in good faith (Heritage Residential Care, Inc. v. Division of Labor Standards Enforcement, et al., 192 Cal. App. 4th 75 [2011]).

Heritage Residential Care, Inc. employed a number of individuals who, because they did not have social security numbers, were classified as independent contractors. Accordingly, these individuals were provided with a federal Form 1099 for tax purposes. They were not provided with itemized wage statements, as required by Labor Code Section 226 (a), because Heritage did not think it was necessary since they were independent contractors rather than employees. During a DLSE workplace inspection, Heritage was cited for failing to provide itemized wage statements to these individuals and assessed a penalty of $250 for each employee that did not receive an itemized wage statement.

Heritage challenged the citation and during an Administrative Hearing stated it believed that because these individuals were independent contractors, there was no need to provide the wage statements. Based on Heritage’s mistaken belief in the law, it claimed that the failure to provide the wage statements was an "inadvertent mistake" and asked for a reduction or an elimination of the penalty assessment. Heritage was unsuccessful at convincing the hearing officer that noncompliance was inadvertent. Heritage was again unsuccessful in the trial court and continued to fight the assessment on appeal.

Heritage brought the issue to the 6th U.S. District Court of Appeal, which was asked to determine the meaning of "inadvertent." Labor Code Section 226.3 allows the Labor Commissioner to "consider whether the violation was inadvertent, and in his or her discretion, may decide not to penalize an employer for a first violation when that violation was due to a clerical error or inadvertent mistake." Therefore, the issue was whether Heritage’s reason for failing to provide the wage statements was considered an inadvertent mistake under the Labor Code.

Unable to rely on legislative history, the court looked to other resources to provide a reasonable definition. The court concluded that the term "inadvertent," as used in section 226.3, carries its ordinary meaning of "unintentional," accidental, or "not deliberate."

Once the Court formulated its definition, the facts of the case were applied and the court concluded that Heritage’s conduct was not inadvertent. Heritage argued that it failed to provide itemized wage statements because it misunderstood the law. Heritage claimed it thought the purpose of itemized wage statements was to inform the employee on the amount of taxes withheld. Because its workers were classified as independent contractors and given 1099s, Heritage didn’t see any reason for also providing an itemized wage statement. Heritage also claimed it was unaware that itemized wage statements are intended to also inform employees on the number of hours worked and how they were paid.

The court of appeal rejected Heritage’s argument and concluded that based on the evidence, Heritage’s failure to provide itemized wage statements were "an intentional act on its part." The court further stated that the employer’s subjective belief and ignorance of the law could not serve as a basis for excusing an employer for noncompliance. The court concluded that Heritage’s conduct – failing to provide itemized wage statements – was not deemed "inadvertent" for purposes of Labor Code Section 226.3.

The court paid close attention to the employer’s reasons for failing to provide itemized wage statements – a misunderstanding about the purpose and application of the Labor Code requirement. The court was unwilling to allow a misunderstanding of the law to constitute as an "inadvertent" mistake. As a result, the case highlights the fact that ignorance or lack of understanding of California’s Labor Code will do nothing more than cost you money.

Best Practices

  • Ensure employees receive a written statement itemizing the hours worked and wages earned as required by Labor Code Sections 226 through 226.6.
  • Comply with requirements of Section 7 of the wage orders and Sections 1174 and 1174.5 of the Labor Code.
  • Take this quiz to understand the difference between classification as independent contractor or employee. Consult legal counsel if needed.
  • Use the Independent Contractor Wizard for guidance through properly classifying an employee as an independent contractor.