On January 26, 2011, in Heritage Residential Care, Inc., the California Court of Appeal ruled that an employer’s failure to provide itemized wage statements is not “inadvertent” where the legal requirements of the wage statement statute are clear and settled, even if the employer’s failure was due to its good faith misunderstanding of the law.

Case Background

Heritage Residential Care, Inc. operates residential care facilities in California, and during the relevant time employed 24 workers. Of the 24 employees, 16 lacked social security numbers. Heritage treated these employees as independent contractors, and issued them Form 1099 federal income tax statements instead of itemized wage statements as required by the Labor Code. In October 2008, the Division of Labor Standards Enforcement (“DLSE”) performed a workplace inspection and determined that Heritage failed to provide all of its employees with itemized wage statements. The DLSE cited Heritage and assessed a $72,000.00 penalty under section 226.3 of the Labor Code (288 violations at $250 per violation).

In assessing a penalty, section 226.3 of the Labor Code requires the DLSE to consider whether the employer’s violation of the wage statement statute was inadvertent. If the DLSE determines that the violation was inadvertent, the DLSE has discretion not to penalize the employer.

At the DLSE administrative hearing, Heritage testified that, because the employees lacked social security numbers, Heritage understood no taxes could be withheld and therefore did not believe wage statements must be provided. When the hearing officer explained that wage statements are required regardless of the presence or absence of social security numbers, Heritage said it was ignorant of that fact. Heritage argued that its failure to provide wage statements was inadvertent, due to its mistaken good faith belief regarding the need for wage statements for employees without social security numbers. The hearing officer upheld the DLSE’s citation and assessment of penalties.

The Appeal

The Labor Commissioner is not required to examine the employer’s state of mind when making a determination of “inadvertent” mistake: On appeal, Heritage argued that its failure to provide wage statements was “inadvertent” within the meaning of Labor Code section 226.3 because it did not intend to violate the wage statement statute, but rather misunderstood its application. Heritage further argued that the DLSE misconstrued section 226.3 by failing to consider Heritage’s mental state when the violation occurred, and also by failing to examine evidence of inadvertence. The Court of Appeal disagreed.

First, the court determined that the word inadvertent means unintentional, accidental, or not deliberate. Because the word “inadvertent” implies the absence of deliberation, no mental state intending to violate the law is required when assessing penalties. Therefore, the DLSE did not err in failing to consider the employer’s state of mind when it determined the absence of inadvertent mistake. The court also noted that the hearing officer invited Heritage to proffer evidence of clerical error or other evidence of inadvertent mistake, and considered Heritage’s testimony when making the determination.

An employer’s misunderstanding of the law is not inadvertent within the meaning of Labor Code section 226.3: At the administrative hearing, Heritage explained that it was under the mistaken impression that, since no taxes were to be reported for the workers lacking social security numbers, itemized wage statements also were not required, and therefore its failure to provide wage statements was inadvertent. Again, the court disagreed. Citing the hearing officer’s determination, the court explained that Heritage’s failure to provide wage statements was intentional. Heritage was aware that wage statements must be provided, but was operating under a good faith mistaken belief when it misclassified employees as independent contractors.

The court noted this was not a case where the legal requirements of the statute were unclear or unsettled and therefore Heritage’s mistake of law was not a defense to non-compliance.

What Heritage Means for Employers

This case cautions employers that a misunderstanding of the Labor Code will not excuse a violation or protect the employer from the assessment of penalties, even when the misunderstanding is based on the employer’s good faith effort to properly interpret the law. Therefore, it is important to consult with qualified labor and employment counsel regarding the various wage-hour obligations imposed on employers by the Labor Code and the Wage Orders, many of which are very technical. The case also reminds employers to exercise extreme caution when classifying workers as independent contractors.