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Finally, Good News for California Employers: Extension of Good Faith Dispute Defense for Wage-and-Hour Penalties

March 2, 2023

Finally, Good News for California Employers: Extension of Good Faith Dispute Defense for Wage-and-Hour Penalties

March 2, 2023

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The decision brings a degree of relief to California employers plagued by wage-and-hour claims that often include penalties for faulty pay stubs.

In a significant victory for California employers, the state Court of Appeal issued a decision on February 27, 2023, that provides them with a defense to wage statement penalties recoverable under Labor Code § 226 when they can show a “good faith” belief in their compliance with the Labor Code. See Naranjo v. Spectrum Security Services, Inc. (Feb. 27, 2023 Second District, Div. Four No. B256232) __Cal.App.5th __. Note: Duane Morris was counsel for the defendant in this appellate case.

In a published decision of widespread importance to employers of all sizes in California, the Court of Appeal held that under both Section 203 (waiting time penalties) and Section 226 (wage statement penalties), an employer’s good faith belief that no wages are owed will operate to preclude a finding that the employer “willfully” or “knowingly and intentionally” failed to comply with the statutory requirements. While prior cases have recognized that such good faith beliefs or disputes can preclude the imposition of waiting time penalties in other contexts (Labor Code § 203 and California Code and Regulations § 13520), it was unclear whether such defenses could be applied in the context of wage statement penalties (Labor Code § 226’s “knowing and intentional” requirement)―until now.

The decision brings a degree of relief to California employers plagued by wage-and-hour claims that often include penalties for faulty pay stubs. Under California law, if an employer requires an employee to work during all or part of a meal period, the employer must pay the employee one additional hour of pay at the employee’s regular rate of pay, otherwise known as a meal period premium. Up until the 2022 California Supreme Court decision in Naranjo v. Spectrum Security Services, Inc. (2022) 13 Cal.5th 93, there was a split between California and federal courts as to whether meal period “premium pay” statutory penalties were considered “wages” that must be listed on wage statements under Labor Code 226 and in final paychecks under Labor Code 203.

Once those issues were resolved by the California Supreme Court, the matter was remanded to the Court of Appeal to resolve two remaining issues:

  1. Whether the trial court had erred in finding the employer had not acted “willfully” in failing to timely pay employees premium pay (thereby barring recovery of waiting time penalties), and
  2. Whether the trial court had erred in awarding wage statement penalties based on a finding that the employer’s failure to report missed-meal premium pay on wage statements was a “knowing and intentional” failure for purposes of recovering penalties and attorneys’ fees under Labor Code 226.

In effect, the trial court recognized the good faith dispute defense as to waiting time penalties, but refused to recognize it for wage statement penalties, even though both statutes require showing that the employer knew of the violation.

The employer prevailed on appeal, dodging penalties for inaccurate pay stubs and not paying final wages on time because it believed in good faith its actions were lawful. It had not knowingly and intentionally violated California law. Finding in favor of the employer, Spectrum, the Court of Appeal affirmed the trial court’s denial of Labor Code 203 waiting time penalties and reversed the award of wage statement penalties under Labor Code 226. As to the waiting time penalties, the court rejected the plaintiff’s argument that California regulations, which clarify that “willfully” under the waiting time penalty statute recognizes a good faith dispute standard, was limited only to Labor Commissioner hearings.

Turning to the wage statement penalty statute, the court then framed the issue as whether the “willful” standard under that statute is the same as the “knowing and intentional” standard in the wage statement penalty statute, such that a “good faith dispute” defense should apply to claims for penalties under both sections. Siding with the majority of California’s federal district courts, and relying on the analysis of the California Supreme Court in In re Trombley (1948) 31 Cal.2d 801, the court rejected Naranjo’s argument that the knowing and intentional requirement is a “minimal standard” that can be satisfied by merely showing the employer’s inadequate wage statement was simply not an inadvertent error or a clerical mistake. Instead, the court agreed that, like the willfulness standard under the Section 203 waiting time penalty statute, the knowing and intentional showing requires that the plaintiff show something more than an inadvertent error or mistake. The court held, “consistent with California precedent linking the ‘willfulness’ standard [under Section 203] to a ‘knowing and intentional’ standard [as used in Section 226], we agree with the weight of authority that a good faith dispute over whether an employer is in compliance with section 226 precludes a finding of a knowing and intentional violation.”

Here, the trial court found that the employer presented several good faith defenses that precluded a “willfulness” finding under the waiting time penalty statute. The court also noted that whether meal time premium pay was a “wage” that must be included on paychecks under Sections 203 and 226 was not resolved until the state Supreme Court’s 2022 decision in Naranjo, which provides an additional defense. Thus, the Court of Appeal held that the trial court had erred by imposing penalties under the wage statement penalty statute because Spectrum’s good faith defenses precluded a “knowing and intentional” finding.

What This Means for Employers

The decision is a rare win for employers in the context of California wage-and-hour rules and regulations. It serves as a reminder for businesses with employees in California that staying current with state employment laws and exercising strong, compliant wage-and-hour practices are critical for avoiding claims. Savvy employees know that employer violations of California employment laws can result in significant penalties and awards. To help protect against claims, all employers should ensure employees are paid on time and that pay stubs comply with California law. Updating employee handbooks with compliant meal and rest breaks, overtime and timekeeping policies―and establishing good practices to ensure they are followed―are equally important. Knowing what the laws are by staying abreast of developments and complying in good faith may help defend against penalties if a claim arises.

For More Information

If you have any questions about this Alert, please contact Robert D. Eassa, Paul J. Killion, Sarah A. Gilbert, 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.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.