California Supreme Court Issues Favorable Decision for Employers by Confirming a Good-Faith Defense to Certain Statutory Wage Statement Penalties

05.14.2024

On May 6, 2024, in the matter of Naranjo v. Spectrum Security Services, Inc., Case Number S279397 (“Naranjo”) the California Supreme Court issued a critical decision regarding wage statement compliance in California under Labor Code section 226, holding that an employer’s “good faith belief that it has provided employees with adequate wage statements precludes an award of penalties under Section 226.”

Background on Relevant Laws:

Labor Code section 226(a) mandates that upon the payment of wages, California employers must provide employees with itemized wage statements (most commonly referred to as “wage statements” or “pay stubs”) containing numerous categories of information, including: (1) gross wages earned; (2) total hours worked by the employee; (3) the number of piece-rate units earned and any applicable piece rate if the employee is paid on a piece-rate basis; (4) all deductions; (5) net wages earned; (6) the inclusive dates of the pay period for which pay is issued; (7) the name of the employee and the last four digits of the social security number or the employee id number of the employee; (8) the legal name and address of the employing entity; (9) all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each rate by the employee.

If an employer fails to provide its employees with compliant wage statements under Labor Code section 226(a), the employer may be liable for penalties under Labor Code section 226(e). Labor Code section 226(e) provides that “an employee suffering injury as a result of a knowing and intentional failure by an employer to comply with subdivision (a) is entitled to recover the greater of all actual damages or fifty dollars ($50) for the initial pay period in which a violation occurs and one hundred dollars ($100) per employee for each violation in a subsequent pay period, not exceeding an aggregate penalty of four thousand dollars ($4,000), and is entitled to an award of costs and reasonable attorney’s fees.” (emphasis added)

The Naranjo Decision

In the Naranjo matter, Plaintiff Gustavo Naranjo pursued class action claims on behalf of all non-exempt employees of Defendant Spectrum Security Services, Inc. (“Spectrum”), alleging, amongst other claims, that Spectrum violated State regulations regarding meal periods by failing to provide duty free meal periods and by failing to provide appropriate meal period premium payments to employees for the failure to provide compliant meal periods. Naranjo also alleged that Spectrum’s failure to provide its employees with meal period premiums resulted in additional, derivative violations of Labor Code section 226(a) – on the basis that the failure to provide meal period premium pay led to a corresponding failure to report all wages earned by employees on their wage statements.

Spectrum opposed the claim alleging derivative violations of Labor Code section 226 on the basis of its failure to comply with Section 226(a)’s reporting requirements was not “knowing and intentional.” Spectrum introduced evidence to support this, including testimony from management personnel establishing that Spectrum was unaware of its obligation to provide meal period premiums for meal periods that were not fully off-duty.

In its May 6, 2024, decision, the California Supreme Court agreed with Spectrum, and held affirmatively that when “an employer shows that it reasonably and in good faith, albeit mistakenly, believed that it complied with Section 226, subdivision (a), that employer’s failure to comply with wage statement requirements is not ‘knowing and intentional,’ and the employer is therefore not subject to penalties under Section 226[e].” Applying this principle to the facts at hand, the Court found that Spectrum was not subject to penalties under Section 226(e), due to the evidence it had presented regarding its good faith belief, and on the basis that the alleged violations predated the California Supreme Court’s own determination that meal period premiums should be considered wages and are thus subject to Section 226(a)’s reporting requirements. (The determination that meal period premiums are wages that need to be reflected on wage statements was made by the California Supreme Court in an earlier decision in this exact same matter in 2022: Naranjo v. Spectrum Security Services, Inc. (2022) 13 Cal.5th 93, 102–104.)

Takeaways:

Naranjo is a considerable victory for California employers, which going forward, will not be subject to harsh derivative penalties under Labor Code section 226(e) in instances where a violation of Labor Code section 226(a) was the result of a reasonable and good-faith belief that the employer’s wage statements were compliant.

The Court noted that such a defense will not be viable when an employer’s obligations are well established, but that good faith defenses are viable when the underlying requirements are “genuinely uncertain.” Thus, for example, in a hypothetical scenario where an employer entirely omits one of the specific categories of information required under Section 226(a) such as the name and address of the employer, a good faith defense is unlikely to be successful.
Despite this positive development, it is still vital that employers ensure that wage statements are compliant and contain all required categories of information, as the potential penalties for violations remain harsh, especially in representative and class action matters.

Should you have any questions regarding this development, or should you wish to have AALRR conduct a compliance analysis of your company’s wage statements, please contact the authors or your usual counsel at AALRR.