Good Faith Defense Upheld for Wage Statement Penalties

Good Faith Defense Upheld for Wage Statement Penalties

In a win for employers, the California Supreme Court recently held that if an employer reasonably and in good faith believed it was providing a complete and accurate wage statement as required by California’s wage statement law — even if it was ultimately incorrect — then it hasn’t “knowingly and intentionally” failed to comply with the law, which would subject the employer to additional penalties.

In Naranjo v. Spectrum Security Systems, Gustavo Naranjo brought a class action case against Spectrum Security Systems for violations of California’s meal break requirements. The case sought meal break premium pay as well as penalties for failure to pay final wages at separation and failure to report premium pay on wage statements.

If this case sounds familiar, it’s because the case started back in 2007 and had quite a journey though the court system. In 2022, it made its way to the California Supreme Court, which ruled that premium pay for missed meal and rest periods constitutes “wages” under California law, subject to the same timing and reporting rules as other forms of compensation under the California Labor Code. The case was then remanded for consideration of waiting time and wage statement penalties.

As previously reported, the Court of Appeal ruled that an employer’s good faith belief that it was complying with state wage and hour laws — even if ultimately incorrect — precluded the award of both waiting time and wage statement penalties under the Labor Code, which may be imposed when the employer acted “willfully” in failing to timely pay employees (waiting time penalties) and when the failure to provide accurate wage statements was “knowing and intentional” (wage statement penalties).

The court found that Spectrum presented good faith defenses at trial for its failure to pay meal premiums, so it didn’t act “willfully” in failing to pay. Similarly, the court concluded that Spectrum had a good faith belief that it followed wage statement requirements and, therefore, didn’t “knowing and intentionally” fail to provide accurate wage statements.

On appeal to California’s highest court again, the California Supreme Court agreed with the Court of Appeal that if an employer reasonably and in good faith believed it was providing a complete and accurate wage statement in compliance with California’s wage statement law, then it has not knowingly and intentionally failed to comply with the law and is not subject to wage statement penalties. The ruling, thereby, resolves a dispute amongst lower courts on whether a good faith defense was available for wage statement penalties, rejecting a minority view to the contrary.

The California Supreme Court notes that whether premium pay for missed meal breaks should be reported on wage statements as “wages” was unsettled when the case was tried between 2007-2009 and wasn’t settled until the California Supreme Court’s 2022 decision. Imposing liability under these circumstances would “penalize Spectrum not for failing to apprise itself of its obligations, but for failing to predict how unsettled legal issues would be resolved many years down the line.”

As penalties for wage statement violations can be substantial, this significant decision for California employers provides them with an additional defense for these claims. However, to establish a good faith defense, employers must show that they did their best to comply with the law, so employers should continue to ensure they follow best practices to comply with California’s wage statement requirements, including periodic audits of statements for accuracy and evaluation of the company’s underlying pay practices to ensure all wages are being accounted for.

James W. Ward, Employment Law Subject Matter Expert/Legal Writer and Editor

CalChamber members can read more about Premium Pay for Meal and/or Rest Break Violation in the HR Library. Not a member? Learn more about how HRCalifornia can help you.

Leave a Reply

Your email address will not be published. Required fields are marked *