Court Sets the Tone for Good Faith Defenses to California Wage Statement Penalties

Good news from the California Supreme Court has been sparse for businesses in the Golden State recently. Employers received a bit of a reprieve when the state supreme court last week held in Naranjo v. Spectrum Security Services, Inc. that “an employer’s objectively reasonable, good faith belief that it has provided employees with adequate wage statement precludes an award of penalties under [Labor Code] section 226, subdivision (e)(1).” As California Labor Code class actions and Private Attorneys General Act (PAGA) actions have proliferated in recent years, a Section 226 wage statement violation has been a popular derivative claim. 

California Labor Code Section 226 requires businesses to provide their employees with wage statements listing various items, including gross and net wages, hourly rates, both base and overtime, and hours worked, among other things. An employer who violates Section 226 may be subject to statutory penalties of up to $4,000 per employee, or actual damages, if the employee can establish a “knowing and intentional failure” to comply. 

In Naranjo, the plaintiff, on behalf of a class of non-exempt employees, sought statutory penalties based upon the employer’s failure to provide meal breaks required by California law and the related failure to report the required premium pay for missed meal breaks on employees’ wage statements, pursuant to Section 226. 

For its part, Spectrum Security, a federal contractor, argued that California meal break requirements were inapplicable because its employees were performing federal functions largely on federal property. Although Spectrum Security was ultimately found to have violated California law, the trial court found its defenses were reasonable and made in good faith, but also found the employer was subject to statutory penalties because its failure to report premium pay for missed meals on wage statements was nevertheless “knowing and intentional.” 

After a circuitous appellate history related to other issues, the California Court of Appeal reversed the trial court’s award of statutory penalties. 

Agreeing with the Court of Appeal, the state Supreme Court found that Section 226’s “knowing and intentional” standard is materially the same as the “willful” standard from other sections of the Labor Code, such as Section 203 (regarding waiting time penalties), which withholds penalties for nonpayment of wages when an employer disputes an employee’s claim for wages in good faith. Thus, like Section 203 penalties, the court held that an employer’s good faith defenses to a Section 226 violation may also preclude an award of penalties. 

Because the trial court found that Spectrum Security's defenses were reasonable and made in good faith, the Supreme Court affirmed the Court of Appeal’s decision that statutory penalties under Section 226(e)(1) were unwarranted.

Employer Takeaways

While this ruling may not end, or even slow down, Labor Code class and representative action claims, it will give California employers another arrow in their quiver to defend such cases. Having good policies and practices is the first step to not only mitigating the risk of a Labor Code lawsuit, but if your business finds itself involved in such an action, those policies and practices may provide such a good faith defense to these derivative Section 226 penalties. 

Employers facing such Labor Code class actions should consider undertaking an analysis of their defenses at the outset of litigation in order to strategically deploy supporting facts in discovery that may preclude an award of statutory penalties under Section 226.