Indiana Employers Earn New Wage Claim Defense

by Kristopher N. Kazmierczak
Katz Korin P.C.
334 N. Senate Avenue
Indianapolis, Indiana 46204

As of July 1, 2015, Indiana employers are no longer automatically liable for paying liquidated damages as a penalty for overdue wages under Indiana law. [1] Indiana law previously mandated that an employer must pay a maximum of double the amount of unpaid wages as a penalty for unlawfully withheld wages, without exception. [2] Before the revision, courts had no discretion to deny an award of liquidated damages in connection with meritorious wage claims. [3]

A monumental shift in Indiana’s wage statute took effect on July 1, 2015 when, for the first time in over a century, the Indiana General Assembly authorized courts to use their discretion when considering an award of liquidated damages for overdue wages. [4] Following the change in the law, an award of liquidated damages can only be imposed after the court is convinced that the employer was not acting in “good faith” when it failed to timely pay wages. [5] Although this significant change was presumably intended to avoid unfair results for honest mistakes by employers, it will likely cause more uncertainty and indecision for employers, employees, and the courts when assessing potential liability for liquidated damages. Additionally, the change will likely lead to more uncertainty over responsibility for liquidated damages and litigation over past due wages.

Under Indiana Code section 22-2-5-1:

Every person, firm, corporation, limited liability company, or association, their trustees, lessees, or receivers appointed by any court, doing business in Indiana, shall pay each employee at least semimonthly or biweekly, if requested, the amount due the employee. [6]

Indiana’s wage statute provides that “payment shall be made for all wages earned to a date not more than ten (10) business days prior to the date of payment.” [7] Oftentimes, wage claims arise from a failure to pay wages timely when an employee is involuntarily terminated or resigns. [8] Indiana Code section 22-2-9-2 provides that “[w]henever any employer separates any employee from the pay-roll, the unpaid wages or compensation of such employee shall become due and payable at regular pay day for pay period in which separation occurred . . . .” [9] It must also be kept in mind that while the term “wages” has not been defined by statute, courts have determined wages to cover more than salary or hourly pay. [10] Wages may also include other forms of employment compensation, such as vested unused vacation time, bonuses, and commissions, depending on the specific circumstances and terms of compensation at issue. [11] As such, employers should consider all forms of compensation and benefits when undertaking a wage claim analysis.

Until the recent change in Indiana law, employers knew with certainty that if wages were not timely paid, then they would be responsible for paying liquidated damages. [12] No affirmative defense existed and courts lacked judicial discretion to alter the penalty. [13] As such, employers could easily predict their potential liability, assuming they did not correctly pay their employees. [14] This degree of certainty and predictability led to greater self-governance by employers to pay their employees timely. [15] Employers were also incentivized to pay overdue wages voluntarily, including penalties before a lawsuit is threatened or shortly after the filing of a lawsuit. [16] Additionally, the mandatory penalty enhanced legal counsel’s ability to provide clear guidance as to an employer’s full potential for liability with confidence. In these ways, the public policy to ensure timely payments to employees was well served by the prior version of the wage statute. [17] Furthermore, the judicial system did not appear taxed with an abundance of disputes over claims for liquidated damages.

In the past, the Indiana Supreme Court has also observed the positive effects that the mandatory liquidated damages provision and the absence of a good faith defense had on public policy serving the interests of both employers and employees. [18] In its review of the wage statute existing prior to the recent addition of the good faith defense, the Indiana Supreme Court explained that:

[P]ermitting a good faith exception to the Wage Payment Statute would contravene the public policy of the statute to ensure that employers pay their employees’ wages in a timely fashion and in the correct amount. Many employees find it essential that they be paid on time to meet current obligations of daily life. Employees often do not have the will or economic staying power to engage in a court battle over relatively small amounts. Without the incentive of liquidated damages and attorney fees, employees may be hesitant to assert claims for violations of the law. If so, a good faith defense would lessen the deterrent effect of the penalty provision of the Wage Payment Statute. [19]

With the removal of the deterrent effect described by the Indiana Supreme Court, it should be expected that there will be an increase in wage claim disputes and litigation over good faith defenses.

The remedy section of Indiana’s wage statute sets out that “[e]very such person, firm, corporation, limited liability company, or association who shall fail to make payment of wages . . . shall be liable to the employee for the amount of unpaid wages,” together with reasonable attorney’s fees and court costs. [20] With respect to liquidated damages, the statute has been revised as follows:

[I]f the court . . . determines that the person, firm, corporation, limited liability company, or association that failed to pay the employee . . . was not acting in good faith, the court shall order, as liquidated damages for the failure to pay wages, that the employee be paid an amount equal to two (2) times the amount of wages due the employee. [21]

It is clear from the newly-revised statute that liquidated damages shall be awarded upon a showing that the employer was “not acting in good faith;” however, the phrase “good faith” was not defined by statute. What specifically will be considered by the judiciary to meet the good faith burden is not presently known with certainty. Nonetheless, one thing is certain: the revised statute gives each judge the discretion to weigh and determine the question of good faith. [22] Until case law is well developed, what constitutes “good faith” will be within the sole discretion of the court and every dispute on good faith will be determined on a case-by-case and judge-by-judge basis. Short of a flat-out intentional and blatant decision not to pay wages when known to be due, the potential factual circumstances and various contractual terms of compensation that might lead to a good faith defense are presently endless.

It may be that courts will apply previously established standards for testing a good faith defense. For instance, courts may adopt an approach of determining whether there is “truly a good faith dispute as to exactly what was due the Plaintiff at the termination of her employ[ment],” as one Indiana trial court ruled over twenty years ago and before Indiana’s recent recognition of the good faith defense. [23] In other contexts of Indiana law, such as insurance law, courts have required a showing that the defendant had “knowledge that there was no legitimate basis for denying liability.” [24] In cases of libel or slander, Indiana courts have defined good faith to mean “a state of mind indicating honesty and lawfulness of purpose; belief in one’s legal right; and belief that one’s conduct is not unconscionable.” [25] In the meantime, employers should remain alert and prepared to examine and consider whether legitimate grounds exist to dispute payment of wages when the question initially arises and thereafter in the event a claim is pursued.

Many wage claims arise out of disputes over compensation based on ambiguous contract terms or nebulous or complicated commission formulas. [26] Although the use of the phrase “good faith” was undoubtedly intended to allow for flexibility to avoid perceived harsh results, it is foreseeable that the new revision will naturally lead to more litigation centered on “good faith” arguments, particularly disputes based on differing views of contract interpretation. One way to prepare against the potential risk of wage claims and the imposition of liquidated damages might include carefully drafting contract terms concerning compensation. As part of this exercise, it is important to outline and document all compensation and benefit terms offered by the employer and to ensure the document is signed by the employee. It is likewise helpful to explain compensation formulas, conditions, and contingencies in simple and unambiguous terms.

Even with safeguards in place, such as well-written contracts, skillful and careful assessment must be used when employers decide whether to assert a good faith defense. Obviously, the good faith defense may heighten the temptation to raise plausible, but less than strongly convincing, contract interpretations to contest liquidated damages. The risk will be higher costs, including prolonged litigation and an attorney’s fee award to the employee, if such borderline arguments are rejected by the court and it finds the employer’s interpretation and arguments were not made in good faith. Given the impact and potential outcomes of the recent change in Indiana’s wage statute, employer assessments and legal guidance on when to pursue a good faith defense will be a challenging and critical step in the defense of each wage claim and will likely depend on the factual circumstances and the specific judge making the ruling at least until case law develops.

[1] See Ind. Code § 22-2-5-2 (2015) (requiring a showing of bad faith to impose liquidated damages).

[2] Ind. Code § 22-2-5-2 (2014) (amended 2015).

[3] Id.

[4] Ind. Code § 22-2-5-2 (2015).

[5] Id.

[6] Id. § 22-2-5-1.

[7] Id.

[8] See, e.g., Naugle v. Beech Grove City Sch., 864 N.E.2d 1058 (Ind. 2007) (employee voluntarily resigned); Highhouse v. Midwest Orthopedic Inst., P.C., 807 N.E.2d 737 (Ind. 2004) (employee resigned); Lemon v. Wishard Health Servs., 902 N.E.2d 297 (Ind. Ct. App. 2009) (employee was involuntarily terminated); Reel v. Clarian Health Partners, Inc., 873 N.E.2d 75 (Ind. Ct. App. 2007) (employees were involuntarily terminated).

[9] Ind. Code § 22-2-9-2 (2015).

[10] See Berry v. Crawford, 990 N.E.2d 410, 428 (Ind. 2013) (quoting Highhouse, 807 N.E.2d at 740 (quoting Pyle v. Nat’l Wine & Spirits Corp., 637 N.E.2d 1298, 1300 (Ind. Ct. App. 1994))) (“We have held that payment denominated ‘bonus’ is a wage ‘if it is compensation for time worked and is not linked to a contingency such as the financial success of the company.’”); Naugle, 864 N.E.2d at 1067 (Ind. 2007) (“[I]f vacation pay is to be compensated, it is deferred compensation in lieu of wages and is subject to the provisions of the Wage Payment Statute.”); Mortg. Consultants v. Mahaney, 655 N.E.2d 493 (Ind. 1995) (wage damages included the amount of commission owed to the employee under his employment contract).

[11] See Berry, 990 N.E.2d at 428; Naugle, 864 N.E.2d at 1067; Mortg. Consultants, 655 N.E.2d 493.

[12] Ind. Code § 22-2-5-2 (2014) (amended 2015).

[13] Id.

[14] See St. Vincent Hosp. & Health Care Ctr., Inc. v. Steele, 766 N.E.2d 699, 706 (Ind. 2002) (Boehm, J., concurring) (“A statute providing one party with treble damages and attorney’s fees is a very substantial deterrent to an employer’s playing fast and loose with wage obligations. As applied to claims of most works this is very understandable legislative policy.”).

[15] Id.

[16] Id.

[17] See E & L Rental Equip., Inc. v. Bresland, 782 N.E.2d 1068, 1071 (Ind. Ct. App. 2003) (stating that public policy favors the “prompt payment of wages owed to employees.”).

[18] See generally Naugle v. Beech Grove City Sch., 864 N.E.2d 1058 (Ind. 2007).

[19] Id. at 1065.

[20] Ind. Code § 22-2-5-2 (2015).

[21] Id. (emphasis added).

[22] Id.

[23] See Todd v. Stewart, 566 N.E.2d 1077, 1078 (Ind. Ct. App. 1991).

[24] Monroe Guar. Ins. Co. v. Magwerks Corp., 829 N.E.2d 968, 976 (Ind. 2005).

[25] Owens v. Schoenberger, 681 N.E.2d 760, 764 (Ind. Ct. App. 1997).

[26] See, e.g., Naugle v. Beech Grove City Sch., 864 N.E.2d 1058, 1067-69 (Ind. 2007).


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