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Wednesday, January 26, 2011

Heritage Residential: Court Limits "Inadvertence" Defense In Check Stub Penalty Action

At issue in this appeal is a civil penalty, assessed under Labor Code section 226.3, for appellant’s failure to provide itemized wage statements to all of its employees as statutorily required. Appellant unsuccessfully challenged the penalty below, first at an administrative hearing and later in the trial court, arguing that its noncompliance was inadvertent within the meaning of the statute and that respondent erred in determining otherwise. Appellant renews those arguments here.

Interpreting the pertinent statutory language as a matter of first impression, we conclude that the statute’s references to “inadvertent” violations offer no grounds for setting aside the penalty assessed against appellant. We therefore affirm the judgment.
Heritage Residential Care, Inc. v. DLSE (1/26/11) --- Cal.App.4th ----, 2011 WL 227691. Slip op. at 1.

Heritage Residential Care (Heritage) operated seven residential care facilities. Heritage employed 24 people, 16 of whom did not have social security numbers. Heritage treated them as independent contractors and did not provide them with the check stub information required by Labor Code section 226. The Division of Labor Standards Enforcement (DLSE) cited Heritage under Labor Code Section 226.3 in the amount of $72,000: 288 violations at $250 per violation.

After an administrative hearing, the DLSE found that the violations were not inadvertent and affirmed the citation. Heritage then filed an action for administrative mandamus. After hearing, the Superior Court (Santa Clara County Superior, Judge Elfving) denied the petition and entered judgment for DLSE.

On appeal, Heritage argued that its alleged inadvertence should have been a defense to the citation and that a mitigated penalty should have applied. The Court rejected these arguments and affirmed the judgment.
Section 226.3 requires the Labor Commissioner to “take into consideration whether the violation was inadvertent” and permits respondent to “decide not to penalize an employer for a first violation when that violation was due to a clerical error or inadvertent mistake.” As parties both acknowledge, the statute envisions a two-part analysis: first, a mandatory consideration of whether the violation was inadvertent; second, if inadvertence is found, a discretionary decision about whether to penalize a first violation. The parties disagree on the meaning of the statutory term “inadvertent.” As noted, resolving that dispute requires us to engage in statutory construction. We undertake that task de novo.

Slip op. at 4.

Absent a definition of the word "inadvertent" in the Labor Code, the Court adopted its ordinary meaning: “inadvertent” means “unintentional,” “accidental,” or “not deliberate.” The Court explained that "inadvertent" does not mean the lack of mens rea. "Inadvertence thus denotes no particular mental state." Slip op. at 5.

At bottom, appellant's claim rests on its erroneous contention that both mental state and conduct must be considered in determining inadvertence. For reasons discussed above, that contention is unavailing. The statute does not require the Labor Commissioner or the court to “attempt to divine the employer's subjective belief about the law.”

Appellant also urges that respondent erred in not considering its assertion that its noncompliance was based on a good faith mistake of law. Appellant acknowledges the general rule that “ignorance of a law is not a defense to a charge of its violation.” But appellant insists that it was not ignorant of the requirements of section 226.3, as evidenced by its provision of itemized wage statements to some of its workers. Instead, appellant claims, it was operating under a good faith but mistaken belief about the law's requirements when it misclassified other employees as independent contractors.

Appellant's argument is unpersuasive. This is not a case where the legal requirements of the statute were unclear or unsettled. Under these circumstances, appellant's mistake of law is not a defense to noncompliance. Appellant's conduct thus cannot be characterized as “inadvertent” for purposes of section 226.3.

Finally, appellant asserts an abuse of discretion, based on its claim that respondent failed to consider evidence of its inadvertence, thereby contravening the statutory command that “the Labor Commissioner shall take into consideration whether the violation was inadvertent....” (§ 226.3.)

We find no basis to sustain appellant's contention that evidence of its “mental state and inadvertent violation ... was disregarded.” Concerning appellant's mental state, respondent had no reason to consider such evidence, since the employer's state of mind is irrelevant under the statute. Concerning inadvertence, appellant's evidence was considered. The hearing officer invited proof from appellant, saying “if you can show clerical error or inadvertent mistake, I may be able to exercise some discretion.” After receiving all of the proffered evidence, the hearing officer again discussed inadvertence with appellant and agreed to “give it some consideration.” No failure to comply with the statutory directive appears on this record.

We therefore reject appellant's claim that respondent misapplied section 226.3. In light of our conclusion that appellant's failure to issue itemized wage statements was not inadvertent within the meaning of the statute, we need not and do not reach appellant's alternative argument for a mitigated civil penalty.

Slip op. at 8-9.

Heritage thus brings Labor Code section 226.3 into line with the "willfulness" requirement of Labor Code section 203:

The term “willful” within the meaning of section 203, means the employer “intentionally failed or refused to perform an act which was required to be done.” It does not mean that the employer's refusal to pay wages must necessarily be based on a deliberate evil purpose to defraud workers of wages which the employer knows to be due.

Road Sprinkler Fitters Local Union No. 669 v. G & G Fire Sprinklers, Inc. (2002) 102 Cal.App.4th 765, 781.

The Heritage opinion is available here.

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