California Supreme upholds employer’s good faith belief defense against Labor Code Section 226 Penalties

In a May 4, 2023 article “Hold your breath: California courts continue to weigh wage statement violations,” published in the Los Angeles Daily Journal, we explored a split in thinking on the subject of whether employers can defeat Labor Code section 226 penalties for a knowing and intentional failure to report unpaid wages, or any other required information, on a wage statement by proving a good faith belief defense disputing that unpaid wages are due. Naranjo v. Spectrum Security Services, Inc. (2023) 88 Cal.App.5th 937, 949-951(Naranjo IV) decided that employers could advance a good faith belief defense, but another Court of Appeal soon afterward came to the opposite conclusion in Gola v. University of San Francisco (2023) 90 Cal.App.5th 548, 566-557 (Gola). We observed that this issue was ripe for California Supreme Court review, a prediction that came to pass when the court granted review in Naranjo IV.

In a rare win for employers, the California Supreme Court, on May 6, 2024, issued its unanimous decision in Naranjo v. Spectrum Security Services, Inc. (2024) Case No. S279397 (Naranjo V), affirming the appellate court’s conclusion in Naranjo IV that employers do have a good faith belief defense in cases involving Labor Code section 226 penalties.

The litigation in Naranjo was quite lengthy, having several appellate trips up and back, springing from plaintiff’s putative class action alleging that the defendant had violated Labor Code section 226 by failing to report premium amounts due to employees who missed meal breaks. Section 226 requires California 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, with injunctive relief, costs, and attorney’s fees available for noncompliance but with statutory penalties of up to $4,000 or the employee’s actual damages also available if the employer has knowingly and intentionally failed to comply with section 226’s requirements. In a prior opinion, the California Supreme Court found that section 226 required wage statements to list premium pay for missed meal periods (Naranjo v. Spectrum Security Services, Inc. (2022) 13 Cal.5th 93, 102-104 (Naranjo III)), remanding the matter to the intermediate appellate court to determine whether defendant’s failure to list such premium pay on its wage statements was “knowingly and intentional” for purposes of justifying imposition of section 226 penalties. The appellate court in Naranjo IV held defendant had a reasonable, good faith belief about the accuracy of its wage statements based on the uncertainty in the law until Naranjo III was decided. (Naranjo IV, 88 Cal.App.5th at pp. 948, 931.) Later in the year, the First District Court of Appeal expressly rejected the reasoning in Naranjo IV, siding with the minority approach on the issue as embodied in such decisions as Furry v. East Bay Publishing, LLC (2018) 30 Cal.App.5th 1072, 1085 and Kao v. Holiday (2017) 12 Cal.App.5th 947, 961-962. (See Gola, 90 Cal.App.5th at pp. 566-567.)

Despite the divide on this legal issue, the California Supreme Court determined that a good faith belief defense was available to employers when it came to section 226 premium penalties. The initial analysis undertaken was to look at dictionary definitions of “knowing” and “intentional”—which show that a deliberate mental state of mind must be involved—but then determine what must be done knowingly and intentionally, namely, violating the law or the acts or omissions constituting the violation. Answering the question, according to the court, required a careful construction of the words of the penalty provision “in their statutory context,” citing Jerman v. Carlisle, McNelli, Rini, Kramer & Ulrich L.P.A. (2010) 559 U.S. 573, 585. The “knowing” and “intentional” language appears in a penalty provision, with employees entitled to injunctive relief, costs, and attorney’s fees for noncompliance even absent the added state of mind element. Beyond that, civil penalties generally are not imposed against a party who acted with a good faith and reasonable belief in the legality of his or her actions in a variety of civil cases.

Then, the state supreme court observed that section 226 wage statement claims are usually brought as derivative claims to other wage/hour claims and, based on several Labor Code provisions having “willful” penalty provisions, it focused on the fact that California case law uniformly has recognized a good faith defense under Labor Code section 203 for penalties imposed on an employer only in situations where there were willful failures to pay wages of employees who are discharged or who quit, having analogous similarities to section 226 penalties, citing In re Trombley (1948) 31 Cal.2d 801, 807-808 and subsequent cases to support this logic. “We see no sound reason why the Legislature would have wished to withhold penalties for nonpayment of wages when an employer ‘disputes in good faith an employee’s claim for wages’ [citing Trombley, 31 Cal.2d at p. 808], and yet would have wished to impose penalties for failing to document those same earned but unpaid wages on an itemized wage statement.”

Plaintiff employee argued that “ignorance of the law is no excuse” maxim applied, but the state high court found that defendant’s transgression fell within an exception that exempts unwitting violations.

Plaintiff next objected that section 226(e)(3) only applies to clerical or inadvertent mistakes, as the Gola court found (90 Cal.App.5th at p. 566), but the California Supreme Court found that the provision does not specify a comprehensive definition of “knowing and intentional” such that this one situation was simply illustrative rather than exhaustive.

Although finding the legislative history of section 226(e)(1) to be sparse, the salient history showed the intent behind the penalty provision was to punish those who knowingly and intentionally flouted the law, rather than punish those who made good faith mistakes about what the law requires.

However, to ameliorate concerns that this would incentivize employers to utilize ignorance of the law excuses, the Naranjo V opinion made the section 226 good faith defense only available “where employer’s obligations are genuinely uncertain,” not where there is a failure to comply with well-established law. This is an objective reasonableness standard and was met under the facts before the court: defendant actually had won on its legal defenses more than once—especially on the issue of whether premium pay for missed meal breaks should be reported, which was unsettled when the case was tried. Given the high court’s earlier clarification in Naranjo III that premium pay for missed meal breaks must be listed on wage statements, this good faith defense may have more limited application in the future. Naranjo V disapproved of the contrary results reached in Gola, Furry, and Kao in finding that a good faith defense was applicable.