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California Supreme Court:
Good Faith Precludes Penalties for Wage Statement Errors
By Kimber Cooley, Staff Writer
The California Supreme Court held yesterday that an employer’s objectively reasonable, good faith belief that it has provided employees with adequate wage statements precludes an award of statutory penalties for failing to comply with wage statement requirements.
The decision comes in a case in which it was alleged that the employer’s statements were improper for failing to report as wages premiums owed for deprivation of meal breaks.
Whether the missed-break premium pay counted as wages was a hotly litigated issue and was ultimately resolved by the high court in a unanimous 2022 opinion by Justice Leondra Kruger holding that such pay is, indeed wages, subject to timely payment and reporting under the Labor Code. The decision left open the question as to penalties for failing to report the premium wages on the employee wage statements.
Kruger again wrote the opinion for a unanimous court, affirming the judgment of Div. Four of this district’s Court of Appeal which, in turn, had reversed the judgment of Los Angeles Superior Court Judge Barbara Scheper.
Justice Kelli Evans served as acting chief justice and First District Court of Appeal Justice Victor Rodriguez, sitting by assignment, filled out the panel.
Kruger noted that there was a conflict in authority as to the issue before the court and “[w]e granted Naranjo’s petition for review to resolve the conflict.”
Labor Code Violations
The employer in question is Spectrum Security Services, Inc., a security company providing custodial services to federal agencies by transporting and guarding prisoners who require medical attention or other services outside the custodial facilities.
Plaintiff Gustoff Naranjo worked as a guard for Spectrum and was fired after leaving his post to take a meal break in violation of a Spectrum policy requiring all custodial employees to remain on duty during meal breaks.
Naranjo filed a putative class action alleging, among other things, that Spectrum had violated Labor Code §226.7 and that the company owed an additional hour of pay—known as “premium pay”—for each day on which Spectrum failed to provide employees a legally compliant meal break.
Sec. 226(a) requires employers to provide their employees with written wage statements listing gross and net wages earned, hourly pay rates, hours worked and other employment-related information. In the case of a “knowing and intentional failure…to comply,” §226(e) provides for statutory penalties of up to $4,000 or the employee’s actual damages, whichever is greater.
Based on this statutory framework, Kruger said, “[t]he question presented is whether an employer has knowingly and intentionally failed to comply with section 226’s requirements when the employer had a good faith, yet erroneous, belief that it was in compliance.”
She reasoned that “[t]he question revolves around the mental element, or scienter, specified in section 226’s penalty provision: What must be shown to demonstrate ‘a knowing and intentional failure by an employer to comply with [section 226]…’?”
Division in Authority
Noting that “[t]he Courts of Appeal and federal district courts…have taken two divergent approaches,” she said that Naranjo argued for a standard that looked only to whether the employer was aware of the “factual predicate” constituting the violation. She remarked:
“Under this test, a failure to comply with section 226 is knowing and intentional if the employer was aware of the underlying facts giving rise to its violation of section 226….”
Spectrum, on the other hand argued for a standard requiring that the employer reasonably believed that it was not required to include the missing information in its employee wage statements.
The justice noted that the legislative history was not “particularly revealing” but that “what we can glean is consistent with the view that section 226 subdivision (e)(1) was not meant to punish good faith wage statement mistakes.”
Penalty Provision
Kruger opined that both parties had reasonable arguments in their favor and said:
“The critical debate between them concerns not so much what the terms ‘knowing’ and ‘intentional’ mean, but what the terms modify. That is to say, what, precisely, must be done knowingly and intentionally: violating the law, or the acts or omissions constituting the violation?”
She continued:
“Two features of…context are particularly relevant here, and lead us to conclude that section 226, subdivision (e)(1) is best read to allow for a defense based on good faith belief in compliance. First, the operative ‘knowing and intentional’ language does not appear in a liability provision, but in a penalty provision.”
The jurist noted that, as a general rule, courts will not impose civil penalties against a party that acted with a good faith and reasonable belief in the legality of his actions because “the purpose of imposing civil penalties is typically, as with punitive damages, not primarily to compensate, but to deter and punish.”
Interplay Between Statutes
She said the second and “equally critical contextual consideration concerns the relationship between section 226 and other provisions of the Labor Code” pertaining to timely payment of wages. She pointed, in particular, to §203 which requires a “willful” failure to pay for penalties to attach.
Kruger pointed out that “[c]ourts have…uniformly recognized a good faith defense to penalties under section 203.”
The jurist commented that the “knowing and intentional” standard in §225 seems to seek to “avoid penalizing an employer who reasonably and in good faith disputes that it is required to report certain amounts as wages.”
Given the interplay between the sections, she reasoned:
“As a practical matter, 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.”
Ignorance of the Law
She rejected Naranjo’s argument based on the axiom that “ignorance of the law is no excuse” and commented:
“[T]his venerable principle, stated categorically as it often is, nonetheless has well-understood exceptions….When laws are specifically aimed at conduct that has been undertaken with disrespect or disregard for the governing law, it follows that the law will exempt unwitting violations.”
She also found lacking Naranjo’s assertion that the court’s holding would create perverse incentives, saying:
“Because courts already evaluate an employer’s misunderstanding of legal requirements against a standard of objective reasonableness, there is little reason to worry that recognizing a good faith defense to section 226 wage statement penalties will create adverse incentives for employers.”
Applying the standard to the present case, she said:
“Before our 2022 decision, it was uncertain whether Spectrum had violated section 226. The question whether wage statements must include premium pay for missed meal breaks, even if unpaid, was complex and debatable…. Given the uncertainty and confusion, it was not objectively unreasonable for Spectrum to believe, in the period between June 2004 and September 2007, that it had no obligation to report meal premiums as wages. 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.”
The case is Naranjo v. Spectrum Security Systems, Inc., 2024 S.O.S. 1524.
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