California Supreme Court Rules That An Employer’s Good Faith Belief That A Wage Statement Is Accurate Is A Valid Defense

CATEGORY: Private Education Matters
CLIENT TYPE: Private Education
DATE: May 29, 2024

Spectrum Security Services, Inc. transports guards, prisoners, and detainees who require outside medical attention or have appointments outside custodial facilities.  Gustavo Naranjo worked as a guard for Spectrum.  Naranjo was suspended and later fired after leaving his post to take a meal break, in violation of a Spectrum policy that required custodial employees to remain on duty during all meal breaks.

Naranjo filed a class action lawsuit on behalf of Spectrum employees, alleging, among other claims, that Spectrum violated state regulations governing meal breaks.  The complaint sought an additional hour of pay (known as premium pay) for each day on which Spectrum failed to provide employees with a legally compliant meal break.  The complaint also alleged: (1) that Spectrum did not timely pay employees owed meal break premiums as wages once they were discharged or resigned, in violation of Labor Code sections 201, 202, and 203; and (2) that Spectrum failed to report the premium pay it owed as wages on employees’ wage statements, in violation of Labor Code section 226.

The trial court ruled that Spectrum’s failure to timely pay meal period premium wages was not willful, and therefore Spectrum was not subject to penalties under the Labor Code section 203.  On appeal, the Court of Appeals ruled that the trial court erred in finding that Spectrum’s failure to report meal premium pay on employees’ wage statements was knowing and intentional under Labor Code section 226.  The Court of Appeals reasoned that the “willfulness” requirement under Labor Code section 203 was substantially identical to the “knowing and intentional” requirement under Labor Code section 226.  The Court of Appeals ruled, therefore, that penalties should be precluded.  The Court of Appeals also noted that there was a good faith dispute about whether premium pay was owed, and if premium pay constituted wages that must be reported on the wage statements.

Under Labor Code section 226, employers must meet detailed requirements for the content of wage statements, including requirements to report an employee’s hours worked, wages earned, hourly rates, and employer- and employee-identifying information.  A knowing and intentional violation of Labor Code section 226 is a misdemeanor offense and can result in fines and imprisonment penalties.  However, the statute does not define “knowing and intentional.”

Naranjo argued that “knowing and intentional” is based on an employer’s awareness of the underlying facts giving rise to the violation of section 226, and that the violation was not the product of a clerical error or inadvertent mistake.  Spectrum argued that “knowing and intentional” requires a showing that the employer knew that it was required to include certain information in wage statements—here, unpaid premium pay for missed meal breaks—and nevertheless intentionally omitted that information from the wage statements it provided.

The California Supreme Court concluded that “knowing,” “intentional,” and “willful” can be used interchangeably.  The Supreme Court also concluded that Labor Code section 226’s penalty provision speaks to the knowing and intentional failure to comply with the law.  The Court reasoned that employers should not be penalized if they reasonably and in good faith dispute that it is required to report certain amounts as wages or otherwise disputes its obligation to craft its wage statements in a particular matter.

Practically, the Court considered that employees so often bring claims for violations of both section 203 and 226, and the provisions should be read in harmony.

Thus, the Court 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 Labor Code section 226.  An employer that believes reasonably and in good faith, albeit mistakenly, that it has complied with the wage statement requirements does not fail to comply with those requirements knowingly and intentionally.

The California Supreme Court upheld the Court of Appeals ruling because Spectrum disputed its liability reasonably and in good faith, so could not be held liable for penalties under section 226.  Spectrum had some uncertainty about whether California wage laws and orders applied to their officers since they are federal security contractors.  Further, section 226 did not include missed-break premium pay among the categories of information that must be included in wage statements.

Note:  Penalties for wage statement violations can only be recovered for “knowing and intentional” violations.  With this decision, if employers can demonstrate a good faith belief in the accuracy of their wage statements, they may be able to argue that there was not a failure to comply with the Labor Code, and therefore a penalty should not apply. 

Naranjo v. Spectrum Security Services, Inc. (May 6, 2024) ___Cal.5th___ [2024 Cal. LEXIS 2438].

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