California Supreme Court Blocks Wage Statement Penalties Where Employer Acted in Good Faith
This month, the California Supreme Court issued an important ruling—and a rare victory for employers—in resolving a decades-old class-action lawsuit. In Naranjo v. Spectrum Security Services, Inc., Case No. S279397 (May 6, 2024), the Court held that when an employer has an objectively reasonable and good-faith belief that it satisfied Section 226 of the California Labor Code, governing wage statement requirements, this may be used as a defense to claims for penalties for inaccurate wage statements.
Background on Wage Statements
Under California law, an employer is required to provide its employees with an itemized statement for all wages paid. Labor Code Section 226(a) enumerates nine (9) types of information that must be on a wage statement, and its subsection (e) contemplates derivative penalties that are available for violations of that section.
In Naranjo, the plaintiff first filed a class-action lawsuit against his employer alleging meal-and-rest break violations in 2007. After several years of litigation, the California Supreme Court previously looked at the issue of whether “premium” pay for employees who miss their meal-and-rest breaks, like the Naranjo plaintiff, are considered “wages” that must be reported on wage statements, as part of the requirements of Section 226(a), and the Court answered “yes” to that question. See Naranjo v. Spectrum Sec. Servs., Inc., 13 Cal. 5th 93, 126 (2022) (holding that meal-and-rest period premiums are “wages” for purposes of reporting on wage statements and paying out final pay within the statutory deadline). This ruling meant that any premium pay owed to nonexempt employees must be reported on official timesheets and wage statements, as well as paid out as part of final pay to departing employees.
However, that decision left issues unanswered, including whether a failure to report premium pay on wage statements was “knowing and intentional” for the purposes of imposing penalties under Labor Code section 226(e) (which provides for statutory penalties of up to $4,000) for knowing and intentional violations of the reporting requirements in Section 226. In this most recent appellate decision, the California Supreme Court considered whether employees can recover civil penalties against their employers for violations of violations of Section 226 if the employer maintained a good-faith belief that they were in compliance with the law.
No Penalties Under Section 226 For Reasonable, Good-Faith Belief that Statements are Complaint
With its May 6, 2024 ruling, the California Supreme Court resolved a lower court split by concluding that an employer who “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” for purposes of the penalty provision contemplated in Section 226(e)(1). In so concluding, the Court looked at the language of Section 226, and ruled that it is “best read” to permit defenses based on compliance, because the “knowing and intentional” language is in a penalty provision—not a liability provision. As the Court put it, the reason for asking whether an employer has “knowingly and intentionally” failed to violate the statute is not to assess whether there was a violation—it is to issue a penalty, the purpose of which is not to compensate allegedly aggrieved employees, but to “deter and punish” employers. Moreover, the Court looked to the interplay between Section 226 (wage statements) and Section 203 (waiting-time penalties) and observed that employees tend to raise violations of both statutes based on the same underlying violations of the Labor Code. Due to this, the two penalty provisions are “best read in a manner that harmonizes them rather than one that sets them at cross-purposes.”
Key Employer Takeaways
Penalties for violations of California’s wage statement requirements can be significant—particularly in representative and/or class-action litigation. Naranjo gives employers a defense for these types of claims. However, for this defense to be available, employers must demonstrate good-faith efforts to comply with California law. Employers should carefully review their internal practices and policies, including wage statement audits to ensure compliance. In addition, evaluation of an employer’s underlying pay practices can help with consistency and accuracy.
The information, comments, and links posted herein do not provide specific legal advice. For legal advice, please contact an attorney at FitzGerald & Mulé LLP.