In reaching this conclusion, the court highlighted that the plain text of Labor Code Section 226(e) does not itself, read in isolation, answer the issue of whether a good faith defense applies. 

On May 6, 2024, the California Supreme Court issued its decision in Naranjo v. Spectrum Security Services, Inc., Case No. S279397, handing California employers a significant victory. The court unanimously held that a good faith dispute defense applies to claims for penalties or damages for inaccurate wage statements under California Labor Code Section 226(e). The Naranjo decision, in a rare win for California employers, resolves a split in authority in the California Courts of Appeal and enables employers who act in good faith to defend against inaccurate wage statement penalties under Section 226(e). Note: Duane Morris served as appellate counsel for Spectrum in this case.

Case Background

The procedural history of Naranjo involves multiple appeals and two visits to the California Supreme Court. Gustavo Naranjo worked as a security officer for Spectrum Security Services. Spectrum contracted with federal agencies, including the U.S. Marshals Service, FBI, Federal Bureau of Prisons, ICE and DEA, to provide guarded transport for federal prisoners and detainees. Because of the nature of such work, Spectrum paid the officers continuously through their shifts and did not provide an unpaid 30-minute meal period.

In 2004, Naranjo filed suit alleging, as relevant here, claims under California law for meal period violations (Labor Code Section 226.7) and derivative claims for penalties for failure to pay all wages due at termination (Labor Code Section 203) and inaccurate wage statements (Labor Code Section 226(e)). Naranjo brought the claims on a class basis.

The trial court initially dismissed the claims on grounds they were preempted by federal law. After that ruling was reversed on appeal, the meal period and derivative claims were certified as a class and proceeded to trial. Spectrum asserted a number of defenses to liability premised on the fact that its officers worked alongside and were directed by federal employees on federal lands, taking the position that California meal period requirements were inapplicable. Ultimately, those defenses were rejected. However, the trial court found the defenses were asserted in good faith and therefore found that Spectrum was not liable on the Labor Code Section 203 claim, which imposes liability for a “willful” failure to pay all wages due at termination. As to the wage statement claim under Labor Code Section 226(e)—which requires a “knowing and intentional failure… to comply” with the statute’s requirements before the penalty can be assessed, including a requirement that all wages earned appear on a wage statement—the court held that Spectrum was liable for over $1.1 million in penalties and attorneys’ fees and that its good faith was not relevant.

Another appeal ensued, with the Court of Appeal holding that meal period premiums were not “wages,” the nonpayment of which could feasibly support claims under Labor Code Sections 203 or 226. (40 Cal.App.5th 444 (2019).) The California Supreme Court then granted review to determine whether meal period premiums were penalties or wages, ultimately holding in its 2022 decision that meal period premiums are wages that must be fully paid at termination and need to appear on a wage statement. (13 Cal.5th 93 (2022).) The California Supreme Court then remanded the case to the Court of Appeal to revisit the Labor Code Sections 203 and 226 claims.

On remand, the Court of Appeal found that Spectrum’s defenses had been asserted in good faith and that a good faith dispute as to liability furnished a defense both to claims under Labor Code Section 203 (for penalties for failure to pay all wages at termination) and also to claims under Labor Code Section 226(e) (for penalties for inaccurate wage statements). The Court of Appeal also held that the failure to list meal period premiums on wage statements was not a “knowing and intentional failure… to comply” with Labor Code Section 226(e) because Spectrum could not have known until the California Supreme Court’s 2022 decision in the case that meal period premiums are “wages” that need to appear on wage statements. (88 Cal.App.5th 937 (2023).) See our prior Alert reporting on that decision.

Naranjo sought review of that latter ruling, and the California Supreme Court again took up the case to determine whether a good faith dispute defense applies to wage statement claims under Labor Code Section 226(e). (Naranjo did not petition from the Section 203 ruling.)

The California Supreme Court’s Decision

Affirming the Court of Appeal in full, the California Supreme 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 Labor Code Section 226(e). (S279397 at p. 38.) Because Spectrum’s federal defenses to the underlying meal break claims were asserted in good faith and were objectively reasonable, and because the state of the law (as to whether meal break premiums were wages that had to appear on wage statements) had been unclear until 2022, Spectrum was not liable for penalties and attorneys’ fees under Labor Code Section 226(e).

In reaching this conclusion, the court highlighted that the plain text of Labor Code Section 226(e) does not itself, read in isolation, answer the issue of whether a good faith defense applies. Rather, the answer is found in the context of the statute as a whole and also, to a degree, in its legislative history. As the court explained, Labor Code Section 226 has a “two-tiered remedial structure” that affords injunctive relief for violations, but makes penalties available only for violations that are “knowing and intentional.” Given this tiered approach to remedies, it was reasonable to infer that the California Legislature intended penalties to apply to employers who “flout the wage statement law, and not to [employers] who had made good faith mistakes about what the law requires.” (Id. at 20.) The second contextual clue the court relied upon was the fact that a good faith defense applies to claims for penalties under Labor Code Section 203, which like Section 226(e), are often brought together as derivative claims tied to some other underlying violation of law. The court thought it best to “harmonize” Section 226(e) and Section 203, so that a good faith defense is available to both types of claims for penalties. (Id. at 26.) Further, there was nothing in the legislative history of Section 226(e) to suggest any intent to punish an employer who makes “good faith mistakes about what the law requires”; rather, the legislative history suggested that the intent behind Section 226(e)’s penalty provision was to punish employers who “knowingly and intentionally flouted the law.” (Id. at 36.)

Although Naranjo argued that application of a good faith defense would excuse and even incentivize employers to be ignorant of the law, the California Supreme Court disagreed. It emphasized that an employer’s basis for disputing liability must be “objectively reasonable.” (Id. at 36.) Because of this objective test, the good faith defense “does not reward ignorance of the law” but “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.’” (Id. at 37.)

What This Means for Employers

As with Labor Code Section 203 claims, employers can now defend against the imposition of penalties for inaccurate wage statements by citing their good faith conduct. To succeed in asserting the good faith defense, the employer can cite to evidence of its objectively reasonable mistake of law or to uncertainty in the law. The Naranjo decision, together with the prospect of voter amendment to the state’s Private Attorneys General Act on the ballot in this year’s election, give some hope for employers in what is generally a very dreary area of the law.

For More Information

If you have any questions about this Alert, please contact Robert D. Eassa, Paul J. Killion, Eden E. Anderson, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

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