California Supreme Court Confirms There is a Good Faith Defense to Wage Statement Penalties

The California Supreme Court recently issued its opinion in Naranjo v. Spectrum Security Services Inc., resolving a split of authority in California state and federal courts whether there is a “good faith” defense to claims seeking statutory penalties under Labor Code Section 226. That section provides for the recovery of penalties of up to $4,000 per employee due to “a knowing and intentional failure by an employer to comply with” California’s detailed wage statement requirements.

Agreeing with the employer’s position, the court held 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, subdivision (e)(1). 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.” In so holding, the court adopted the majority view that a good faith defense will preclude Section 226 penalties just like a “good faith dispute” is a complete defense to Labor Code Section 203 claims for “waiting time” penalties.

Background

In Naranjo[1], a security guard for Spectrum Security Services sued, alleging meal period violations as well as derivative claims for penalties for failure to pay all meal premium wages due at termination and failure to provide accurate wage statements under Section 226(e). The California Supreme Court clarified in an initial 2022 appeal (which the court referred to as “Naranjo III”) that Section 226 required wage statements to list premium pay for noncompliant meal periods because they are “wages earned,” and penalties could therefore be recovered if they were not listed.

Further, the court remanded to the court of appeal to determine whether Spectrum’s failure to list such premium pay on its wage statement was “knowing and intentional,” such that penalties could be imposed under Section 226. The court of appeal then agreed with the employer’s position that it was not liable for penalties because it had a good faith belief that its wage statements were compliant. The California Supreme Court granted review.

The Opinion

The court agreed with the court of appeal that there is a ”good faith” defense to Section 226 wage statement penalty claims, like there is for Labor Code Section 203 waiting time penalty claims. First, the court concluded that Section 226(e)(1) “is best read to allow for a defense based on good faith belief in compliance.” The Court noted that the “knowing and intentional” language appears in a penalty provision, not a liability provision, and “[a]s a general rule, ‘courts refuse to impose civil penalties against a party who acted with a good faith and reasonable belief in the legality of his or her actions.’”

Second, the court held that a “willful” failure to pay wages should have the same meaning as a “knowing and intentional” failure to comply with the wage statement requirements. The court found that the intent of Section 226’s penalty provision is “to avoid penalizing an employer who reasonably and in good faith disputes that it is required to report certain amounts as wages or otherwise disputes its obligation to craft its wage statements in a particular manner.” The court reasoned that “because employees so often bring claims for violations of section 203 and section 226 that derive from the same primary violations of the Labor Code, the two penalty provisions are best read in a manner that harmonizes them rather than one that sets them at cross-purposes.”

Last, the court found the plaintiff’s concerns to be “unfounded” that “excusing employers from section 226 penalties based on good faith mistakes of law will excuse and even incentivize ignorance of the law.” The court noted that “courts that have evaluated employers’ good faith when determining whether to award waiting time penalties under section 203 have uniformly focused on whether the employers’ basis for disputing liability was objectively reasonable.”

The court endorsed another court’s view that “the defense does not ‘reward ignorance of the law’; it only means that penalties will be imposed on ‘employers who lack a good excuse’ while employers who face genuine legal uncertainty and make mistakes of law that are reasonable and supported by evidence will be spared.”

As applied to the facts in Naranjo, the court found Spectrum had a good faith and reasonable basis for its belief that the company’s conduct complied with applicable law. Among other things, “Spectrum’s mistaken belief that it did not owe employees premium pay for missed meal breaks was more than mere ignorance; it was supported by evidence and reasonable legal arguments.” Also, during the relevant period the question of whether meal premiums constituted “wages earned” that must be reported on wage statements was “an unsettled legal issue.”

Key Takeaways

This court’s opinion confirms the existence of an important employer defense to employee claims for wage statement penalties under Section 226. However, because the defense is only available for an employer’s “objectively reasonable” belief that its wage statements are compliant with California law, employers should consider reviewing their wage statements with legal counsel.

Although Naranjo addressed the “knowing and intentional” standard for wage statement penalties under Section 226, the Court’s endorsement of a “good faith belief” defense should logically apply to other Labor Code penalty provisions that use similar language. In this regard, the court stated that “several provisions of the Labor Code not at issue here appear to reflect this long-established understanding that the terms ‘knowing,’ ‘intentional,’ and ‘willful’ (and their adverbial forms) can be used interchangeably.”