When is an employer’s violation of providing employees with wage statements knowing and intentional, triggering financial penalties?
Taking its second look at the case, the California Supreme Court ruled that an employer’s objectively reasonable, good faith belief that it has provided employees with adequate wage statements precludes an award of penalties.
Spectrum Security Services provides custodial services to federal agencies, transporting and guarding prisoners and detainees who require outside medical attention or have other appointments.
A guard for Spectrum, Gustavo Naranjo, was suspended and later fired after leaving his post to take a break in violation of a company policy that required custodial employees to remain on duty during all meal breaks.
Naranjo filed a putative class action on behalf of Spectrum employees, alleging that the employer had violated state meal break requirements under the Labor Code and the applicable wage order. He also sought an additional hour of pay – known as “premium pay” – for each day on which Spectrum failed to provide employees with a legally complaint meal break.
After many years of litigation (including a trip to the state’s highest court in 2022, a trial court found that Spectrum’s wage statement omissions were intentional, awarded penalties under Labor Code section 226 but found the employer not liable on section 203 penalties.
An appellate panel weighed in, affirming that Spectrum’s failure to timely pay meal period premium wages was not “willful,” and therefore did not support penalties under section 203. The court reversed on the question of section 226 penalties, however, reasoning that section 226’s “knowing and intentional” requirement was substantially similar to the “willful” requirement, and the employer was not required to make the premium pay penalty.
Noting the division among state appellate courts and federal district courts on the issue, the state’s highest court affirmed.
“Under long established law, an employer cannot incur civil or criminal penalties for the willful nonpayment of wages when the employer reasonably and in good faith disputes that wages are due,” the court wrote. “[I]f an employer reasonably and in good faith believed 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.”
The statute does not define what constitutes a “knowing and intentional” violation, the court acknowledged, but the legislature specified what does not constitute a violation in 2012, including “an isolated and unintentional payroll error due to a clerical or inadvertent mistake.”
Two factors led to the court’s reading of the statue to allow for a defense based on good faith belief in compliance.
First, the operative “knowing and intentional” language does not appear in a liability provision, but in a penalty provision.
“In other words, the purpose of asking whether the employer has knowingly and intentionally failed to comply with the requirements of section 226 is not to determine whether or not the employer has, in fact, violated the statute,” the court wrote. “The question is only whether the employee is also entitled to an additional monetary remedy in the nature of penalties for knowing and intentional noncompliance.”
The purpose of imposing civil penalties is to deter and punish, the court said, and those 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.
“When a statute imposes a two-tier remedial structure, with steeper penalties based on the employer having knowingly and intentionally violated the law, it is reasonable to infer that the Legislature intended for the provision to target those who knowingly and intentionally flout the wage statement law, and not those who have made good faith mistakes about what the law requires,” the court wrote.
The second contextual consideration for the court was the relationship between section 226 and other provisions of the Labor Code. As the case illustrated, section 226 wage statement violations are typically raised as derivative claims of other Labor Code claims, which means in practice that an employer’s good faith mistake about whether certain amounts are owed to a particular employee will frequently give rise to at least two different causes of action and associated remedies.
Courts have uniformly recognized a good faith defense to penalties under section 203, the court pointed out, and several provisions of the Labor Code appear to reflect an understanding that the terms “knowing,” “intentional” and “willful” can be used interchangeably.
With an aim to harmonize the sections, the court found a similar good faith defense to section 226 penalties.
“We hold 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,” the court wrote. “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.”
As for Spectrum, there “is no genuine question that Spectrum had a reasonable, good faith basis for believing it was complying with California wage and hour law,” the court said. “Over the more than 15 years this case had been pending, Spectrum has succeeded with its legal defenses more than once – even though the decisions in its favor would later be overturned on appeal.”
Spectrum’s failure to include unpaid meal premiums in its employees’ wage statement was not knowing and intentional within the meaning of section 226, the court concluded.
To read the opinion in Naranjo v. Spectrum Security Services, Inc., click here.
Why it matters
Employers can breathe a sigh of relief after the California Supreme Court decision, which affirmed that a reasonable, good faith defense exists for violations of section 226 under the state’s Labor Code.