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In a rare win for certain California employers, the California Court of Appeal, Second Appellate District, held in Naranjo v. Spectrum Security Services, Inc. that an employer was not liable for waiting time and wage statement penalties under state law based on the employer’s good faith belief that it was complying with California’s meal period requirements.  

In May 2022, the California Supreme Court issued a decision in Naranjo v. Spectrum Security Services, Inc., holding that premium pay for non-compliant meal and rest breaks pursuant to Labor Code §226.7 is considered wages and not penalties. The fact that the pay constitutes “wages” means that it “must be reported on statutorily required wage statements during employment (Lab. Code § 226) and paid within statutory deadlines when an employee leaves the job (id., § 203).” Significantly, this means that the failure to pay meal and rest premium pay constitutes a claim for unpaid wages and can be the basis for penalties for wage statement violations under Labor Code Section 226 or waiting time penalties under Section 203. 

However, the California Supreme Court remanded the May 2022 case to the Court of Appeal to address whether the employer acted willfully in failing to timely pay employees premium pay for meal period violations, which would trigger waiting time penalties, and whether the employer’s failure to record to the missed meal premium pay on wage statements was knowing and intentional, which would trigger wage statement penalties and attorneys’ fees. 

Regarding waiting time penalties under Labor Code Section 203, the statute requires that the failure to pay wages due is “willful” or penalties will not attach. California Code of Regulations §13520 further provides a definition of "willful." A willful failure to pay wages within the meaning of Labor Code Section 203 occurs when an employer intentionally fails to pay wages to an employee when those wages are due.  

In its February 27, 2023, decision, the California Court of Appeal held in Naranjo that the regulation was enacted to clarify that “a good faith dispute [that] any wages are due will preclude imposition of waiting time penalties under Section 203.” Because the trial court found that there existed a good faith dispute as to whether wages were owed, the plaintiff could only overcome that finding if that original defense was unreasonable or unsupported by any evidence.  

With respect to wage statement violations under Labor Code § 226, the Court of Appeal found that precedent linked the standards behind the terms “knowing and intentional” and “willful,” and determined that they agreed “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.” Where the record demonstrated that the employer had a good faith belief that it was not violating the law by failing to include meal period premium pay on its wage statements, there was no finding that the employer acted knowingly and intentionally. While wage statement violations alone typically are not as significant as waiting time penalties, wage statement violations under Labor Code Section 226 allow the plaintiff to collect attorneys’ fees, which can add up. 

While this decision is being hailed by employers as good news, it is worth reminding employers that this is an appellate decision in the Second District and, therefore, not binding outside that district. Moreover, in this case, the defendants argued that California labor laws did not apply because the class members “were working on federal enclaves and/or performing federal functions such that they should be treated as federal employees.” Although this defense failed, it was the basis for the employer’s “good faith dispute” as to whether wages were owed under California law, which is a very fact-specific defense. 

The decision highlights the importance of employers maintaining compliant meal and rest break practices and policies that provide for premium pay if an employee has a non-compliant meal or rest break. Employers with questions about this decision or their meal or rest break policies can contact the California Legal Services team at CAinfo@employerscouncil.org.