May 8, 2024

Employers Have a Good Faith Defense to Statutory Penalties for Wage Statement Violations

The Question

The basics of California’s wage statement requirements should be familiar to employers. The consequences for failing to comply with these requirements can be severe. By statute, Labor Code section 226(e), an employer faces statutory penalties of up to $4,000 or actual damages for a “knowing and intentional failure . . . to comply.” But what does it mean for a failure to comply to be “knowing and intentional?”

The California Supreme Court’s decision in Naranjo v. Spectrum Security Services Inc. on May 6 gives us the answer.

The Facts

The relevant facts are straightforward. Plaintiff Gustavo Naranjo sued his former employer, Defendant Spectrum Security Services Inc., for violations of California’s meal break laws. As is often the case, Naranjo also brought two “derivative” claims: (1) a claim for waiting-time penalties under Labor Code sections 201–203, on the theory that employees were not paid all wages owed (i.e., the meal period premiums that should have been paid for the meal period violations) at separation, and (2) a claim for penalties under Labor Code section 226, on the theory that employees’ wage statements were inaccurate because they failed to list the (unpaid) meal period premiums. 

After years of litigation, the parties ended up on appeal arguing over whether such “derivative” meal period claims are valid. This should sound familiar. The keen observer will note that this case has been up to the California Supreme Court before. In 2022, the court used this case to hold that unpaid meal and rest break premiums can give rise to derivative claims for waiting-time penalties and inaccurate wage statements. See our previous article, CA Supreme Court: Meal/Rest Break Premiums Can Be the Basis for Waiting Time Penalties and Inaccurate Wage Statement Claims.

The Holding

The case wound its way back up to the California Supreme Court, this time to address whether Spectrum would be on the hook for statutory penalties under Labor Code section 226(e). In other words, was Spectrum’s derivative “failure to comply” with section 226 “knowing and intentional”?

In this second iteration of Naranjo, the California Supreme Court delivered a rare victory for employers. It held 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, subdivision (e)(1). An employer that believes reasonably and in good faith, albeit mistakenly, that it has complied with wage statement requirements does not fail to comply with those requirements knowingly and intentionally.”

The Supreme Court spent considerable time analyzing the statutory language, analogous precedent, and legislative history to arrive at its conclusion that employers retain a “good faith” defense to section 226(e) penalties. While our wonkier readers may be interested in this analysis, we suspect that most of our readers want to know how things played out for Spectrum.

The court held that Spectrum was not liable for section 226(e) penalties. It agreed with the trial court that Spectrum’s legal positions and defenses, while “ultimately unconvincing,” were reasonable and supported by evidence. As such, Spectrum’s violation was not “knowing and intentional.”

For example, Spectrum had argued that as a federal security contractor, California’s wage laws did not apply to its employees. Though it lost that argument, the law was sufficiently unclear that Spectrum’s position was reasonable.

Spectrum had also argued, as noted above, that premium pay for missed meal breaks need not, as a matter of law, be reported on wage statements. Again, though Spectrum lost that argument, the Supreme Court acknowledged that this was “an unsettled legal issue when this case was tried.” The court recognized that before its 2022 Naranjo decision, “[t]he question whether wage statements must include premium pay for missed meal breaks, even if unpaid, was complex and debatable. . . . Given the uncertainty and confusion, it was not objectively unreasonable for Spectrum to believe . . . that it had no obligation to report meal premiums as wages. Imposing liability under these circumstances would penalize Spectrum not for failing to apprise itself of its obligations, but for failing to predict how unsettled legal issues would be resolved many years down the line.”

The Upshot

This decision is welcome news for employers. California’s wage-and-hour laws are notoriously complex and ever-changing. Issues that employers face on a daily basis somehow remain unsettled, forcing employers to make predictions about where the law will end up, all while facing the risk that an incorrect, but good faith and reasonable, prediction will be wrong and lead to crushing liability. Acknowledgment from the Supreme Court that liability (at least for wage statement penalties) is unfair in these circumstances is certainly a win.

Of course, this decision is not a get-out-of-jail-free card or an excuse to let compliance slip. The court’s holding is narrow and does not excuse compliance with settled law. Though the decision is a good one, employers must remain as vigilant as ever in monitoring their compliance with California’s many wage-and-hour requirements.