On August 21, 2025, the California Supreme Court issued a long-awaited decision in Iloff v. LaPaille, a case with two important implications for California nonprofit employers, including private and independent schools. First, the Court addressed what an employer must prove to establish a “good faith” defense to avoid paying liquidated damages penalties for violating minimum wage laws. The Court held that to establish a good faith defense, an employer must show it made a reasonable attempt to determine the requirements of the law and that ignorance of the law is not a valid defense. Second, the Court held that if an employer appeals a ruling issued by the Labor Commission, an employee may raise previously unraised Paid Sick Leave law claims in that appeal. Both holdings highlight the importance of employers proactively learning and complying with the law to avoid costly penalties and protracted claims.
Background: From Housing Compensation to a Statewide Legal Fight
Bridgeville Properties, Inc. (BPI) owned and rented property, where Laurence Iloff lived for free, in exchange for working as a residential property manager and performing maintenance around the property. Both Iloff and BPI assumed he was an independent contractor, who BPI could compensate solely with free-housing. However, years later, after BPI and its CEO terminated this arrangement, Iloff filed a claim with the Labor Commissioner arguing he was an employee, not an independent contractor. He claimed he was entitled to unpaid wages as well as penalties, including Labor Code section 1194.2 “liquidated damages,” which require an employer to pay double any unpaid wages for violating California’s minimum wage laws.
The Labor Commissioner found that Iloff was an employee, both BPI and its CEO were his employers, and awarded him unpaid wages, as well as liquidated damages. This ruling came out of a Berman hearing, an administrative process designed to provide employees a speedy and informal forum for wage claims. The employers appealed to the superior court. Once in superior court, Iloff, now represented by an attorney, reasserted his wage claims and added a new claim for penalties under California’s Paid Sick Leave law.
The Superior Court determined that Iloff was an employee and awarded unpaid wages and related penalties against BPI. However, it ruled for the employer on two issues. First, it denied liquidated damages, finding the employers acted in “good faith” because they and Iloff agreed to payment through free rent and none believed they were violating the law; though no attempt to understand the law was made by BPI or its CEO. Second, it rejected Iloff’s Paid Sick Leave law claim, reasoning that an employee could not raise previously unasserted sick leave claims on appeal from a Berman hearing.
Iloff appealed the Superior Court’s rulings, and the Court of Appeal affirmed both. It reasoned that the employers acted in good faith because, at the time, the law on who qualified as an employee versus an independent contractor was less settled, making it reasonable for the employers to believe they were complying with the law. On the Paid Sick Leave law claim, the Court of Appeal reasoned that the Paid Sick Leave law grants enforcement authority to the Labor Commissioner or Attorney General, and does not create a private right of action for employees to pursue those claims in court. Therefore, the Court of Appeal concluded that employees could not pursue Paid Sick Leave law claims once the Labor Commissioner’s decision moved to the Superior Court on appeal.
California Supreme Court’s Holding: Private Employers Must Proactively Learn About the Requirements of California’s Wage & Hour Laws
The California Supreme Court reversed on both issues. It held that ignorance of the law is not sufficient to establish a “good faith” defense to liquidated damages. Instead, the Supreme Court explained that when an employer fails to pay minimum wages, the default punishment is liquidated damages. A court may only deny or reduce an award of liquidated damages if an employer proves that it acted in good faith by taking reasonable steps to determine what the law required. The Court explained that what will count as a reasonable attempt will depend on the context and must be assessed on a case-by-case basis. Though the Court opined that, in many situations, it would expect even established businesses might be able to meet this obligation without consulting legal counsel.
Notably, in reaching that conclusion, the Court considered the argument that the parties had agreed to pay Iloff solely in housing. The Court rejected that argument explaining that ignorance of the law, even if mutual, is not enough to show good faith. To show good faith, employers must make an effort to determine what the law requires; otherwise, they would have no incentive to learn or follow wage and hour rules.
The Court also rejected the argument that the employers acted in good faith because the legal standard for classifying independent contractors changed over the course of Iloff’s work with BPI. The Court explained that even if that were true, there was nothing in the record that showed the employers even attempted to find out what the standard was at the time. Had there been such an effort, then the lower courts could have considered things like the parties’ relationship, their agreements, and the legal landscape at the time. But in this case, no effort was made to learn what the law required.
The Supreme Court also reversed the Court of Appeal’s decision regarding Paid Sick Leave law claims. It agreed with the Court of Appeal that there is no private right of action to bring a paid sick leave claim directly in a Superior Court action; however, the Court explained that an appeal of a Berman ruling is not a new private lawsuit but a continuation of the administrative process. Therefore, employees may raise Paid Sick Leave law claims on appeal of a Berman ruling. The Court noted that denying that right would undermine the Legislature’s purpose in creating an accessible and efficient enforcement process and would invite employers to file appeals to avoid sick leave liability.
Implications for Private Employers: Audit Practices, Learn the Law, and Double Down on Compliance
This decision raises the stakes for nonprofit employers, including private schools. The Court made clear that good intentions or agreements between the parties are not enough; employers must actively work to understand and comply with wage and hour laws. The ruling also expands the risk of litigation exposure in Berman appeals, since employees may now pursue Paid Sick Leave claims in an appeal to the Superior Court, even if they did not raise them before the Labor Commissioner. This makes wage and hour compliance, to avoid Labor Commissioner proceedings in the first place, more important than ever.
Liebert Cassidy Whitmore is available to advise on the implications of this ruling at your workplaces and to assist with auditing, training, and other preventive measures to improve compliance and reduce claims.
Iloff v. LaPaille (Aug. 21, 2025, S275848) ___ Cal.5th ___ ).