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Finally, A Win for California Employers on Hotly Contested Issue of Inaccurate Wage Statement Penalties

by | May 13, 2024 | blog, Employment Law, Wage & Hour Laws |

Last week, the California Supreme Court’s unanimous decision in Naranjo v. Spectrum Security Services, Inc. (No. S279397, May 6, 2024) delivered a rare victory for California employers. The high court held that employers have a viable “good faith” defense to claims for statutory penalties arising out of wage statements violations.

Case Summary

Gustavo Naranjo worked as a security guard for Spectrum. He was fired when he left his post to take a meal break in violation of company policy requiring guards to remain on duty during meal breaks.

In 2007, Mr. Naranjo filed a class action lawsuit claiming, among other things, meal period violations and inaccurate wage statements. Over 17 years, he filed several appeals, including to the California Supreme Court, which in 2022 held in his favor, finding that unpaid meal and rest break premiums are wages that can be the basis for derivative waiting time penalties (Cal. Lab. Code, § 203) and wage statement penalties (Cal. Lab. Code, § 226).

Relevant here, Mr. Naranjo found himself in front of the Supreme Court again, this time accusing Spectrum of failing to report meal period premiums (now considered wages) on employee wage statements (i.e., paystubs). Mr. Naranjo sought statutory penalties, claiming Spectrum “knowingly and intentionally” failed to issue accurate wage statements in compliance with Labor Code section 226.

Why It Matters

If an employee can show that an employer “knowingly and intentionally” provides an inaccurate wage statement, then the employer becomes liable for statutory wage statement penalties. These penalties are hefty: $50 for the first violation and $100 for each subsequent violation, up to $4,000 per employee. In addition, employees can recover costs and reasonable attorney’s fees. For employers facing wage and hour class action and Private Attorney General Act (“PAGA”) lawsuits, these penalties add up quickly.

Here, Mr. Naranjo took the position that “knowingly and intentionally” simply meant an employer was aware of the “factual predicate” underlying the violation. In other words, whether an employer was aware or should have been aware that its practices violated the law is irrelevant so long as the employer’s actions were not inadvertent or clerical errors.

Spectrum, on the other hand, argued that “knowingly and intentionally” required a showing that the employer knew or should have known it was required to include certain information in the wage statements and nevertheless intentionally omitted that information. Spectrum argued that it should not face statutory penalties since it had a reasonable, good faith belief, even if erroneous, that it did not owe its guards premium pay for missed meal periods.

High Court Ruling

The California Supreme Court sided with Spectrum, unanimously holding that such a good faith belief precludes a finding of “knowing and intentional” conduct and, consequently, the employer is not subject to statutory penalties for its violation of the wage statement requirements. In part, the Court’s reasoned that statutory penalties are meant to punish employers who flout the law. Employers who “proceed on a reasonable, good faith belief that they have conformed their conduct to the law’s requirements do not need to be deterred from repeating their mistake, nor do they reflect the sort of disregard of the requirements of the law and respect for others’ rights that penalty provisions are frequently designed to punish.”

Practical Implications for Employers

This decision provides California employers some long-awaited relief from the state’s otherwise employee-friendly laws and court decisions. Employers now have a defense to penalties if they can point to evidence that they had a reasonable, good faith belief they were in compliance when they issued incorrect wage statements. While the Naranjo decision does not alleviate all stress for California employers, it certainly provides some reprieve for businesses who are doing all they can to comply with the state’s multi-faceted, and often cumbersome, labor laws.

Duggan McHugh will continue to monitor and provide updates as developments arise. Meanwhile, our attorneys are available to help employers navigate employment laws, including complex wage and hour laws.