California Supreme Court Rules Employer Can Avoid Penalties for Good-Faith Wage Reporting Violation

Quick Hits

• The Supreme Court of California concluded that an employer’s objectively reasonable, good faith belief that it has provided employees with adequate wage statements precludes an award of penalties under California Labor Code section 226.
• The ruling means that employers that  reasonably and in good faith believe, albeit mistakenly, that they have complied with the wage statement requirements do not fail to comply knowingly and intentionally.
• The decision may have an impact on the assessment of civil penalties against employers under PAGA.

The unanimous California supreme court decision in Naranjo v. Spectrum Security Services, Inc., resolved the issue over penalties for wage statement violations under section 226(e)(1) of the California Labor Code, which allows employees to recover up to $4,000 in statutory penalties for “knowing and intentional failure by an employer” to furnish accurate wage statements.

The California supreme court affirmed the appellate court, finding that “an employer’s objectively reasonable, good faith belief that it has provided employees with adequate wage statements precludes an award of penalties under section 226.”

“An employer that 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,” the decision stated.

Background

The ruling is the latest in a long-running case first filed in 2007 by security guard Gustavo Naranjo against his former employer Spectrum Security Services. The putative class action alleged Spectrum violated California labor law by failing to provide meal breaks and premium pay for days in which a meal period is not provided. The suit further alleged Spectrum failed to timely pay meal period premium pay and report it in employees’ wage statements. Spectrum argued it was exempt from California meal break requirements as a federal contractor, and that it had valid meal period waivers for its employees.

At first, the trial court granted summary judgment for Spectrum. That decision was reversed on appeal.

At the subsequent trial, the trial court granted a directed verdict in plaintiffs’ favor on their meal break claims. With respect to waiting-time penalties, the trial court ruled in Spectrum’s favor, finding that, although it had rejected Spectrum’s defenses to the underlying claims, Spectrum had acted in good faith and its defenses were not unreasonable. With respect to penalties for inaccurate itemized wage statements, however, the trial court found Spectrum liable because its failure to report premium pay for missed meal breaks was “‘knowing and intentional and not inadvertent.’” Both sides appealed.

The appeals court reversed in part, holding that the trial court properly awarded the employees premium wages based on their being required to take on-duty meal breaks; however, the employees’ entitlement to premium wages under Labor Code section 226.7 did not entitle them to waiting time and itemized wage statement penalties.

The California supreme court reversed in part, holding that the appeals court erred in concluding that premium wages were not wages that trigger waiting time and wage statement penalties.

On remand, the appeals court affirmed the trial court’s conclusion that Spectrum’s failure to timely pay meal period premiums was not “willful,” and therefore did not support imposition of penalties under section 203. However, the appeals court held that the trial court erred in finding that Spectrum’s failure to report meal premiums on wage statements was “knowing and intentional.” The appeals court reasoned that section 203’s “willfulness” requirement and section 226’s requirement of a “knowing and intentional” violation to impose penalties are substantially identical such that the same finding of good faith that precluded an award of penalties under section 203 should also preclude an award of penalties under section 226.

Decision

In a straightforward application of statutory language, the California supreme court held that “if an employer reasonably and in good faith believe[s] it [was] providing a complete and accurate wage statement in compliance with the requirements of section 226, then it has not knowingly and intentionally failed to comply with the wage statement law.”

In other words, the good faith defense that is written into the statute does in fact apply to Labor Code section 226, and it is not limited to circumstances involving clerical error or inadvertence. Accordingly, when an employer establishes that it “reasonably and in good faith, albeit mistakenly, believed that it complied with section 226, subdivision (a), [the] employer’s failure to comply with wage statement requirements is not ‘knowing and intentional,’” and the employer is not subject to penalties under section 226. The court also reaffirmed the good faith defense to claims for penalties for late payment of final wages under section 203.

Implications for Employers

While the language of the statute has always stated that penalties may be recovered for “knowing and intentional” violations, there was a split of authority regarding the meaning of that language. Now, the California supreme court has provided a clear interpretation of the statutory language. Employers may avoid liability for penalties under Labor Code section 226 if they can demonstrate an objectively reasonable and good faith belief in the accuracy of their wage statements.

This decision represents a significant victory for California’s employers facing claims for derivative wage-statement violations predicated on other alleged violations of the Labor Code. If an employer has a good faith belief that, for example, meal period premium wages are not owed  to employees based on a reasonable interpretation of then-existing law, they may also escape penalties under Labor Code section 226 for not having listed such disputed wages on wage statements.

Because a good-faith defense based on a misunderstanding of law under section 226 is available only “where the employer’s obligations are genuinely uncertain,” the defense will not be available to companies that do not comply with well-established law. But in cases where the law is unsettled, employers can fairly benefit from that uncertainty as a defense to section 226 penalties.

Potential Impact on PAGA

The California Court of Appeal, Fourth District has previously held that Labor Code section 2699(e)(2), which provides that “a court may award a lesser amount than the maximum penalty amount specified…,” gives courts discretion to limit penalties in PAGA actions when the maximum penalty would be unjust under the facts and circumstances. The Naranjo case provides another arrow in the quiver for employers trying to avoid or limit PAGA penalties.

The California supreme court noted that its holding was consistent with other provisions of the Labor Code that do not allow for statutory penalties where employers reasonably and in good faith believe that they are complying with the law. The supreme court refers to section 226 penalties as “civil penalties” and quotes from several other cases supporting the conclusion that civil penalties are (1) intended to deter intentional conduct, and (2) should not be awarded if the alleged violator acted in good faith. Based on that reasoning, PAGA penalties, which have similarly been defined as “noncompensatory” penalties to deter bad intentional conduct by employers, should not be imposed for good faith conduct that unintentionally violates the Labor Code based on a reasonable interpretation of the law.

The question becomes, will the Naranjo decision be applied in that fashion, or limited by the trial courts to Labor Code section 226 cases. Employers may seek a broader application of this case, while employees and plaintiffs’ counsel may argue for the latter.

Ogletree Deakins’ California Class Action and PAGA Practice Group will continue to monitor developments and will provide updates on the California, Class Action, and Wage and Hour blogs as more information becomes available.

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