Almost exactly one year ago, the California Supreme Court issued its decision in Gustavo Naranjo v Spectrum Security Services, Inc. (“Naranjo”), reviewing a decision by the Second Appellate District (the “Appellate Court”) in 2019. As we discussed in our California Employment News episode at that time (available here on YouTube, or here on our podcast) and here on our blog, the Supreme Court’s decision opened the flood-gates for employees to recover waiting-time and wage statement penalties whenever meal or rest period premiums went unpaid. This ruling immediately hyper-inflating the value of many wage and hour class actions across the state. On remand, the Appellate Court halted this inflation in some instances by clarifying that such penalties are not available to a class of employees where the employer has a good faith dispute that the premiums were due.
The Supreme Court’s Decision and Remand
First, a quick summary of the Labor Code sections at play: Under Labor Code section 226.7, whenever a meal or rest period is required but is denied by the employer, a “premium” of one hour’s pay is owed to the employee. Wage statement violations under Labor Code section 226 occur when employers “knowingly and intentionally” do not accurately state the gross “wages” earned by employees on their wage statements. Waiting-time penalties under Labor Code section 203 must be paid by employers when they “willfully” fail to pay all “wages” due to departing employees. Before the Supreme Court’s decision a year ago, it was broadly understood that meal period premiums were penalties and not wages, and, consequently, unpaid premiums would not result in derivative wage statement violation or waiting-time penalties. And that’s exactly what the Appellate Court in Naranjo initially held in 2019.
The Supreme Court changed all that in its holding that premiums are both a “legal remedy” and “wages” because an employee becomes entitled to premiums precisely because the employee was required to work when they should have been relieved of duty. As such, wage statement violation and waiting-time penalties would naturally result if break premiums (wages) went unpaid. The Supreme Court remanded the issue of whether such penalties were available under the case at hand.
The Appellate Court’s Decision
After supplemental briefing, the Appellate Court published its opinion earlier this year. (See Naranjo v. Spectrum Security Services, Inc. (2023) 88 Cal. App. 5th 937.) It held that the employer in Naranjo did not willfully withhold wages when it asserted good faith defenses that no wages were due. A “good faith dispute” exists unless the defense is unsupported by “any evidence” or is otherwise “unreasonable.” Since the employer in Naranjo presented some evidence in support of its defenses that the federal enclave and intergovernmental immunity doctrines precluded the application of California law, whether or not that was ultimately the case, it was sufficient to establish a “good faith dispute” which precluded section 203 waiting-time penalties.
The Appellate Court clarified that the “willful” standard under section 203 is functionally identical to the “knowing and intentional” standard under section 226 in this regard, such that a “good faith dispute” would preclude recovery of penalties under both statutes. Therefore, the Appellate Court held that the class was not entitled to section 226 penalties for wage statement violations for the same reasons they were not entitled to waiting-time penalties.
What is perhaps the most beneficial implication to California employers was ironically contained within a footnote to the opinion. There, the Appellate Court noted how, in addition to the other good faith disputes raised by the employer (addressed above), there was also a good faith dispute as to whether premium pay constituted “wages” at all because that issue was not resolved until the Supreme Court’s decision in May of 2022. The same good faith defense would arguably apply to every claim in California that occurred before that time.
Implication for Employers
While the Supreme Court’s ruling was frustrating and costly to many California employers, the Appellate Court’s opinion provides some respite as it could lower or completely eliminate waiting time and wage statement violation penalties that are based on meal and/or rest break violations. Employers should continue to pay premiums to employees who are not provided compliant meal and rest breaks and accurately reflect such payments on employees’ wage statements. However, employers who find themselves named as defendants in a wage and hour class action should identify all good faith disputes and raise them at the onset of the action in the form of affirmative defenses.