In Naranjo v. Spectrum Security Services, the case’s second appearance before the California Supreme Court in two years, the Supreme Court confirmed that an employer does not incur civil penalties for failing to report unpaid wages, or any other required information on a wage statement, if the employer reasonably believed that it was providing a complete accurate wage statement.

Naranjo‘s Odyssey

Naranjo was filed as a class action approximately fifteen years ago, and has navigated through the California court system since. As relevant here, a jury found Spectrum liable on a meal break claim for a period between June 2004 and September 2007 because it did not have a valid meal break policy. Accordingly, Spectrum owed the class meal break premium payments pursuant to California Labor Code section 226.7.

Following the jury’s verdict, the trial court considered whether Spectrum was liable to the class under Labor Code sections 203 and 226 for waiting time and wage statement penalties respectively. Spectrum argued that it was not liable under these Labor Code sections because meal break premium payments are not “wages” subject to statutory timing and reporting requirements. The trial court concluded that Spectrum violated Sections 203 and 226 by failing to pay and report meal premium payments. But the trial court split its decision on the penalties question. An employer is not liable for penalties under Section 203, if its failure to pay final wages is not “willful.” Similarly, an employer is not liable under Section 226, if its failure to provide accurate wage statements is not “knowing and intentional.”

The trial court held that because Spectrum’s failure to pay final wages under Section 203 was not “willful,” it was not liable for waiting time penalties under that provision. Nevertheless, the trial court held that Spectrum was liable under Section 226 for failing to report meal premium payments on employees’ wage statements because its failure was “knowing and intentional and not inadvertent.” On appeal, the Court of Appeal affirmed that Spectrum violated California’s meal break laws between June 2004 and September 2007, but held that Spectrum did not violate Sections 203 or 226, reasoning that the meal premium payment was a penalty and not a “wage” that needed to be paid at separation or reported on wage statements.

Due to the deep conflict between the Courts of Appeal, the California Supreme Court reviewed the issue in 2022. In Naranjo‘s first appearance, the Supreme Court held that a missed meal break premium payment is considered a wage that can support section 203 waiting time penalties and section 226 wage statement penalties when the violation is “willful” and/or “knowing and intentional,” respectively. The California Supreme Court then remanded to the Court of Appeal to address whether the conditions were met to impose penalties under Labor Code sections 203 and 226.

On remand, the Court of Appeal affirmed the trial court’s determination that Spectrum’s failure to timely pay meal period payments was not “willful” and thus did not support penalties under Section 203. But it reversed the trial court and held that the trial court erred in concluding that Spectrum’s failure to report meal period premium pay on employees’ wage statements was “knowing and intentional” since it was uncertain such payments had to be made. Because Spectrum’s failure to include meal period premium pay on wage statements was not “knowing and intentional,” the Court of Appeal held Spectrum’s failure to include the meal period premium pay on the wage statements did not trigger wage statement penalties. The Court of Appeal reasoned that Section 203’s “willfulness” and Section 226’s “knowing and intentional” requirements are substantially identical, so that the conclusion of a lack of willfulness should also result in finding no “knowing and intentional” violation occurred. Due to the conflict between the Courts of Appeal and various federal courts regarding the “knowing and intentional” standard in Section 226, the California Supreme Court accepted the case for review.

California Supreme Court’s Ruling

In Naranjo‘s second appearance, the Supreme Court issued a rare victory for California employers. Naranjo argued that a “knowing and intentional” violation of the wage statement law simply requires a knowledge of the “factual predicate” supporting the violation. Under Naranjo’s proposed rule, there is a “knowing and intentional” violation of Labor Code section 226 whenever the employer knew about the underlying facts supporting the violation, and the violation was not the result of a clerical error or inadvertent mistake. Spectrum argued that the plain meaning of “knowing and intentional” requires a showing that the employer knew that it had to include certain information on the wage statement, but nevertheless intentionally omitted that information.

The Supreme Court concluded that Spectrum had the better reading of the statute. The Supreme Court compared Section 226 to Section 203’s “willful” standard. Under that standard, a good faith dispute that wages are due will preclude the imposition of waiting time penalties under Section 203. Given that Sections 203 and 226 claims are often brought together, the Supreme Court read the statutes to harmonize them. The Supreme Court noted that the legislative history supported its interpretation of Section 226, as its impetus was to punish those employers who systematically refused to provide wage statement information to their employees. Indeed, employer interests dropped their opposition to the legislation once the drafters persuaded them that only employers who intentionally failed to provide wage information should be liable for the consequences.

Applied to the case, there was no genuine question that Spectrum had a good faith basis for thinking it complied with California wage and hour law as it related to the certified class. Throughout the litigation’s 15 year existence, Spectrum succeeded with its legal defenses multiple times, even though the decisions would be overturned on appeal. The primary question of whether missed meal breaks should have been reported on wage statements as “wages earned” was unsettled until 2022 when the Supreme Court resolved that issue in its first Naranjo opinion. Moreover, at the original trial, Spectrum presented defenses that had it prevailed, it would have presented an absolute bar to recovery of meal period premium payments. Accordingly, it was not unreasonable for Spectrum to believe that it did not need to report meal premium payments as wages between June 2004 and September 2007.

Key Takeaways

Naranjo is a rare win for employers in the California Supreme Court. When facing a class action, employers often face significant liability due to the stacking of derivative claims, such as Labor Code sections 203 and 226 claims. This ruling reduces the risk of some of the liability that employers may face. Nevertheless, the Supreme Court made clear that the “knowing and intentional” standard applies only to whether employers are subject to monetary penalties for violation Labor Code section 226. Accordingly, if an employee successfully brings an action for injunctive relief to ensure compliance with Labor Code section 226, a plaintiff could still recover costs and attorneys’ fees.