In 2022, the California Supreme Court held in Naranjo v. Spectrum Security Services, Inc., 13 Cal.5th 93, that premium pay are wages that are subject to the same timing and reporting requirements as other compensation for work. This was a significantly unfavorable ruling for employers because that meant employees who claim that they have not been paid all premium pay were considered employees who have not been paid all wages and thus, can seek additional penalties and fees under Labor Code sections 203 and 226. Since then, it was unclear whether an employer could raise a defense based on good faith dispute in the context of wage statement penalties – at least until now.
In a significant victory for California employers, late last month, the California Court of Appeals issued a decision providing that a good faith dispute is a valid defense to a plaintiff’s entitlement to penalties and attorneys’ fees under Labor Code Sections 226 and 203. This means that an employee must provide that an employer’s failure to pay certain wages, or in this case, premiums, was either “willful” under Labor Code Section 203 or “knowing and intentional” under Labor Code Section 226 to be entitled to wage statement penalties.
The trial court held that the employer asserted good faith defenses that precluded a “willfulness” finding under the waiting time penalty statute. The trial court also noted that whether 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. Accordingly, the Court of Appeal held that the trial court had erred by imposing penalties under the wage statement penalty statute because the employer’s good faith defenses precluded a finding of “knowing and intentional.”
Labor Code Section 203 entitles a plaintiff to both penalties and attorneys’ fees if an employer’s failure to pay all wages due at the time of termination was willful. In its decision, the Court acknowledged that under California Code of Regulation Section 1350, if the employer has a “good faith belief” that it complied with the law when the final wages were due, then the employer’s violation is not considered “willful.” Under this same understanding, the Court found that if the employer had a “good faith belief” that it complied with the law when the final wages were due, the employer’s violation will not be considered “willful.” This means that employers who can establish a good-faith dispute can avoid paying penalties under Labor Code Section 203.
Labor Code Section 226 entitles a plaintiff to both penalties and attorneys’ fees if the employee can successfully show that the employer knowing and intentionally failed to provide compliant wage statements. In this case, the plaintiff argued that the employer’s mere knowledge that meal period premiums were not included on his wage statements demonstrated a knowing and intentional violation. However, the employer demonstrated that it had a good faith belief that it was not violating any laws when it did not include meal period premiums on its wage statements, therefore the Court held that it could not have knowingly and intentionally violated Labor Code Section 226.
While this decision can certainly be considered a “win” for employers – remember that generally, wage and hour laws under California is heavily skewed to be favorable to employees and employers should implement and follow compliant wage and hour policies to avoid costly claims.