By Janine E. Raduechel and Joshua A. Rodine

Seyfarth Synopsis: The California Supreme Court concluded that the “good faith” defense applies to claims seeking to impose penalties under California Labor Code section 226. An employee must show that an employer’s failure to comply with section 226(a) was both knowing and intentional in order to establish an entitlement to penalties. Naranjo v. Spectrum Security Services.

The Facts

Gustavo Naranjo, filed a putative class action on behalf of Spectrum employees alleging, among other things, that Spectrum had failed to pay him an additional hour of pay for each non-compliant meal period. The complaint also asserted the derivative claim that Spectrum had violated California Labor Code section 226(a) by failing to report the additional wages it owed on Naranjo’s wage statements. The complaint sought the statutory penalties prescribed for “willful[]” failure to comply with the timely payment requirements under Labor Code section 203, as well as those under Labor Code section 226(e) for the “knowing and intentional” failure to provide compliant wage statements.

The Trial Court Decision

The trial court found that Spectrum was liable for the failure to provide compliant meal periods. Despite this finding, Spectrum argued that it was not liable for the penalties Naranjo sought under sections 203 and 226 because even if it had violated an obligation to timely pay and report the additional pay owed, its failure was neither “willful” (as required by section 203) nor “knowing and intentional” (as required by section 226). These arguments were based in part on Division of Labor Standards Enforcement (DLSE) regulations, as well as governing appellate case law.

With respect to section 203 penalties, the trial court ruled in Spectrum’s favor. The court concluded that Spectrum’s defenses, if successful, would have defeated Naranjo’s claims, and that those defenses “were presented in good faith and were not unreasonable or unsupported by the evidence.” However, with respect to section 226 penalties, the court concluded that Spectrum was liable for penalties because its failure to report premium pay was “knowing and intentional and not inadvertent.”

The Court of Appeal’s Decision

Both sides appealed the trial court’s ruling. The Court of Appeal affirmed the trial court’s conclusion that Spectrum’s failure to timely pay meal period premium wages was not “willful.” This conclusion was based on a finding that substantial evidence supported the trial court’s conclusion that Spectrum had a good faith basis for believing it was not liable.

However, the Court of Appeal held that the trial court erred in finding that Spectrum’s failure to report meal premium pay on employees’ wage statements was “knowing and intentional.”

Naranjo appealed.

The California Supreme Court’s Decision

In a surprisingly straightforward interpretation and application of statutory language, the California Supreme Court held that “if an employer reasonably and in good faith believe[s] it [i]s 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 section 226, and it is not limited to circumstances involving clerical error or inadvertence (as suggested by Naranjo).

Thus, 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.

What Naranjo Means for Employers

Although this decision will not make complying with the Labor Code and Wage Orders any less challenging for employers, it does provide some welcome ammunition for employers who are defending these types of claims. This is not to say that employers will get an automatic pass, as it will still be necessary to prove an absence of willfulness or knowing intent. Perhaps more importantly, the affirmation of the viability of the good faith defense will force employees’ attorneys to reevaluate the way they value claims.