Los Angeles, Calif. (May 16, 2024) - Just last week the California Supreme Court rendered an opinion that California employers will undoubtedly welcome. In Naranjo (Gustavo) v. Spectrum Security, Inc. (2024 Cal. LEXIS 2438), the Court confronted the issue of whether an employer's good faith yet erroneous belief that it has complied with the wage statement reporting requirements of Labor Code section 226 precludes the imposition of penalties for the knowing and intentional failure to comply with that section. Although the answer to the question seemed to be an obvious "yes," the issue had divided many state appellate and federal district courts that had considered it. Prior to Naranjo, several courts concluded that a knowing and intentional violation occurs whenever the employer knows it has omitted information from the wage statement – in Naranjo, premium pay for missed meal breaks – regardless of whether the employer believes, in good faith, that the wage statement required no further information. The Naranjo decision now puts this issue to rest.
The Naranjo action was filed a decade and a half ago as a putative class action on behalf of employees who alleged that Spectrum Security, a prisoner transportation service, violated state regulations by forcing their employees to remain on duty during their meal breaks. The complaint sought an additional hour of pay – known as "premium pay" – for each day on which Spectrum failed to provide employees a legally compliant meal break. The complaint further alleged that Spectrum violated Labor Code sections 201, 202 and 203 by failing to timely pay owed meal break premiums as wages once employment ended, as well as Labor Code section 226 by failing to report the premium pay owed on employee wage statements. Among other forms of relief, the complaint sought the statutory penalties for the "willful" failure to comply with the timely payment requirements of section 203, and the penalties prescribed by section 226 for the "knowing and intentional" failure to provide accurate wage statements.
After several phases of trial, the trial court ruled for Spectrum with respect to the section 203 penalties, finding that Spectrum's main defense, that premium pay does not constitute earned wages - though incorrect - was presented in good faith and was not unreasonable or unsupported by the evidence. However, with respect to the section 226 penalties, the trial court found that Spectrum was liable for penalties simply because it knew that it had failed to report unpaid meal break premiums on employee wage statements. Hence, the trial court concluded that Spectrum's failure to report premium pay in the wage statements was "knowing and intentional and not inadvertent," given how the courts had interpreted those terms.
On appeal, the Court of Appeal affirmed the trial court's conclusion that Spectrum had a good faith basis for believing that meal period premiums were not wages, and that its failure to pay the missed meal period premiums upon an employee's separation from employment was not willful under section 203. However, the Court of Appeal determined that the trial court had erred in finding that Spectrum's failure to report meal premium pay on the wages statements was knowing and intentional. Adopting a majority view, the Court of Appeal reasoned that section 203's "willfulness" requirement and section 226's "knowing and intentional" requirement are substantially identical, such that a finding of good faith under section 203 should have also precluded an award of penalties under section 226.
The Supreme Court affirmed the ruling of the Court of Appeal, holding that an employer's "objectively reasonable, good faith belief that it has provided employees with adequate wage statements precludes an award of penalties under section 226." In so doing, the Court agreed that the Labor Code considers an employer's good faith defense to penalties for nonpayment of wages under section 203 to apply to its failure to report wages under section 226.
Oftentimes, employees raise the nonpayment of wages under section 203 (e.g. minimum pay or overtime) as a basis for the imposition of derivative penalties under section 226. Employers will now be able to argue against section 226 penalties if they can show that they believed in earnest (i.e., reasonably and honestly) that wages were not due to begin with. The Naranjo decision is a victory for employers because section 203 and section 226 penalties go hand in hand and can result in substantial penalty assessments in class action and PAGA lawsuits. Therefore, it is fair to say that Naranjo takes a large bite out of the apple in favor of employers.
Of course, Naranjo should not be interpreted to mean that employers may simply raise ignorance of the law in response to allegations of nonpayment of wages and corresponding inaccurate wage statements. The Naranjo Court remarked that, whether unpaid premiums for missed meal breaks had to be reported as "wages," and credited as "hours worked," had been unsettled until the Court settled the issue in 2022 on a prior appeal in this case. (Naranjo v. Spectrum Security Services, Inc. 13 Cal.5th 93, 125.) Hence, the outcome on the present appeal would probably have been different had the law on the issue been uniform and decided well beforehand, such that Spectrum should have known that missed meal premiums are earned wages that needed to be reported on its wage statements. In that regard, employers must remain cognizant of California's onerous wage and hour laws and the continually involved judicial glosses on those laws in order to ensure that their employees are properly paid and provided with accurate wage statements.
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