Hold your breath: California courts continue to weigh wage statement violation defense

As we wrote in our March 14 article ("Appeals Court Grants California Employers' Recourse to 'Good Faith Defense' in Wage Statement Disputes," Frost Brown Todd LLP), California employers seemed to face some relief for substantive and attorney's fees exposure with respect to wage statement violations, which typically take place where there is flawed pay stub or pay substantiation noncompliance with Labor Code dictates. A Second District Court of Appeal opinion, Naranjo v. Spectrum Security Services, Inc. (2023) 88 Cal.App.5th 937, pet'n for review filed (Cal. Supreme Court April 7, 2023) No. S279397, indicated that employers could avail themselves of a "good faith dispute" defense. However, a recent First District Court of Appeal decision in California, Gola v. University of San Francisco (Cal. App. April 13, 2023) Case Nos. A161477/A162437 [certified for publication], has introduced confusion as to whether employers can rely on such a defense except in the narrowest of circumstances and a defense which is much constricted from the one endorsed in Naranjo. Employers might have a harder time to prove a "good faith" defense under the Gola standard, introducing more uncertainty as far as contesting wage statement violations in California.

Previous Second District Naranjo Decision - "Good Faith" Defense Available to Employers.

In Naranjo, 88 Cal.App.5th 937, the Second District had to decide whether an employer's failure to report premium pay on wage statements was "knowingly and intentional" under Labor Code section 226(e) for purposes of authorizing penalties and associated attorney's fees under California law.

It decided that a merit-based "good faith" defense was available to the employer for purposes of rebutting the "knowingly and intentional" element of section 226. After reviewing the record, the Naranjo court determined that the employer had potential defenses such as a federal enclave defense and the intergovernmental immunity doctrine. Given that there was some evidence to support these defenses, even though they were found unsuccessful in the end, the testimony proffered by the employer was enough to establish the existence of a good faith dispute and, in the process, defuse penalties and attorney's fees.

In doing so, Naranjo endorsed the reasoning from California federal decisions and In re Trombley (1948) 31 Cal.2d 801, 807-808. This seemed to provide some solace to employers.

First District Court of Appeal, in Gola, Adopts a Narrower "Good Faith" Defense and Does Not Endorse the Test.

Less than two months after Naranjo was published, the First District Court of Appeal in Gola v. University of San Francisco, supra, took a different and much more conservative approach on the contours of the "good faith" defense under section 226.

Gola found that the "good faith" defense for purposes of rebutting the "knowing and intentional" element of section 226 only encompasses "an isolated and unintentional payoff error due to a clerical or inadvertent mistake," but does not encompass a violation based on "competing legal interpretations" (as Naranjo allowed). It analyzed some of the federal decisions relied on by the Naranjo court, but the First District in Gola rejected the analysis by those federal courts.

The interesting aspect of Gola is that it tried to dance around the Naranjo interpretation of the "good faith" defense. However, when the opinion is read contextually, there is little doubt that it departs from the broader "good faith" defense adopted by Naranjo such that there is a split in California appellate court thinking on this issue.

What Happens Next?

A petition for review was filed in Naranjo on April 7 with the California Supreme Court, although this petition did not have the benefit of Gola because it was published on April 13. Given the divergence in approaches on the "good faith" defense between Naranjo and Gola, the issue is ripe for potential California Supreme Court review. In the meantime, employers can avoid this morass by adopting paycheck practices which avoid premium payment disputes in the first place.