On May 23, 2022, the California Supreme Court issued a long-awaited decision in Naranjo v. Spectrum Security Services, Inc., holding unpaid meal and rest break premiums can give rise to derivative claims for waiting time penalties (Labor Code section 203) and inaccurate wage statements (Labor Code section 226). This consequential ruling may significantly increase the exposure for employers in class action lawsuits involving unpaid meal and rest break premiums.
In 2007, Gustavo Naranjo, a former security officer, filed a class action lawsuit against his employer, Spectrum Security Services, Inc., alleging Spectrum failed to provide its employees with meal and rest breaks. Naranjo’s suit sought damages and penalties for Spectrum’s alleged failure to report the premium payment on employees’ wage statements (Labor Code section 226) and to timely provide the payments to employees upon their discharge or resignation (Labor Code section 203).
Following a trial, the court awarded penalties and attorneys’ fees under Labor Code section 226 for derivative inaccurate wage statement claims but denied the claims for waiting time penalties under Labor Code section 203. Both parties appealed: Naranjo challenged the denial of waiting time penalties, while Spectrum challenged the award of attorneys’ fees for inaccurate wage statements.
The Court of Appeal held in relevant part that: employees are not entitled to pursue derivative waiting time and inaccurate wage statement penalties for violations of section 226.7’s meal and rest break provisions. The California Supreme Court granted review, and reversed, holding that the premiums for missed meal and rest breaks constitute “wages” that must be reported on wage statements and timely paid to employees when they are discharged or voluntary separate from a job. As such, employers can be liable under Labor Code section 226 for failure to provide an accurate itemized statement if they do not report missed break premiums. Likewise, an employer that willfully fails to timely pay any unpaid missed-break premiums when an employee leaves the job can be liable under Labor Code section 203.
The Court’s decision includes an in-depth discussion of its past opinions in Murphy v. Kenneth Cole Productions, Inc. (where the Court held that the premiums owed for denial of a meal or rest period under Labor Code section 226.7 are a wage, rather than a penalty, for purposes of determining the applicable statute of limitations) and Kirby v. Immoos Fire Protection, Inc. (where the Court held that a section 226.7 claim is not an action for nonpayment of wages but rather an action for nonprovision of meal or rest breaks). Ultimately, the Court held that a premium payment under section 226.7 is both a legal remedy and a wage, because the premium payments are meant to compensate employees for being required to work when they should have been relieved of duty. The Court analogized missed-break premium pay to overtime premium pay, which the Court noted has always been understood as wages.
The Court specifically states in the opinion that wage statements should include the wages earned, not just the wages actually paid, clarifying the applicability of the appellate court’s holding in Maldonado v. Epsilon Plastics, Inc. The decision also expressly disapproves the Court of Appeals’ decision in Ling v. P.F. Chang’s China Bistro, Inc., “to the extent its discussion of Labor Code sections 203 and 226.7 is inconsistent” with the Court’s opinion in Naranjo.
The Court affirmed only part of the Court of Appeals’ decision: specifically, that the default prejudgment interest rate of seven percent set forth in the state Constitution applies to section 226.7 claims, as opposed to the 10 percent rate awarded by the trial court presumably pursuant to Labor Code section 218.6.
What does Naranjo mean for employers? The Court’s decision makes clear that premium payments for missed breaks are to be considered wages, and accordingly raises the stakes for complying with meal and rest break laws. The decision increases potential exposure for employers, as it allows employees to bring derivative claims for violations of Labor Code sections 203 and 226 based solely on unpaid meal and rest break premiums. These derivative claims can be substantial. The decision is an important reminder that employers should evaluate their policies and procedures for meal periods and rest breaks, timekeeping, and payment of wages to ensure compliance.
Please contact your Payne & Fears attorney with any questions.