On May 6, 2024, the California Supreme Court issued a significant ruling in Naranjo v. Spectrum Security Services, Inc. (Case No. S279397). The decision provides much-needed clarity on California’s wage statement requirements and also held that employers can assert a good faith defense to wage statement claims under appropriate circumstances.

Labor Code section 226 states that California employers must provide employees with accurate itemized wage statements. Employees can seek statutory penalties if an employer fails to provide accurate itemized wage statements and such failure is “knowing and intentional”. (Lab. Code, section 226, subd. (e)(1).). While the statutory penalties are capped at $4,000 per employee (in addition to the employees’ associated attorneys’ fees and costs), the aggregated wage statement penalties can add up quickly in the class action context.

In Naranjo, a former security guard brought a putative class action alleging Spectrum Security Services (SSS) failed to provide accurate itemized wage statements, because they did not include premium payments for missed breaks. The Supreme Court determined SSS’s omission was not “knowingly and intentional,” since there was legal uncertainty as to whether California’s meal and rest break laws applied to SSS given that it was a federal security contractor. The Court also found that there was no evidence in the record suggesting that SSS acted in bad faith or knowingly and intentionally omitted the premium pay from the wage statements.  Thus, the Court determined that SSS, reasonably believed it was providing accurate wage statements in compliance with Labor Code section 226, such that penalties for a “knowing and intentional failure” did not apply.  

Naranjo therefore provides employers with a critical defense to certain wage statement claims that can be asserted on an individual or class wide basis.

Key takeaways from the Naranjo decision

  1. When does the Naranjo defense apply? The good-faith defense under Naranjo is available “where the employer’s obligations are genuinely uncertain.” This means employers may have a defense to section 226 penalties when there is reasonable uncertainty in the applicable law. However, ignorance or negligence does not qualify as a good faith defense, as the Court emphasized the defense cannot be used to reward unawareness of the law.  
  2. Does the Naranjo defense apply to PAGA penalties for wage statement violations? While Naranjo clearly establishes a good faith defense against claims for statutory penalties under section 226, but it did not specifically address the corresponding civil penalties for the same violations under the Private Attorneys General Act (PAGA). The Naranjo discussion on the good faith defense does not distinguish between civil penalties and statutory penalties, and the Court gave no specific indication that the defense should be limited to claims for statutory penalties. Additionally, the Court acknowledged that civil penalties are meant to “deter and punish.” Thus, employers “who proceed on a reasonable, good faith belief that they have conformed their conduct to the law’s requirements do not need to be deterred.” This provides a basis to argue that Naranjo’s good faith defense should shield employers from corresponding civil penalties sought under PAGA.
  3. Missed meal and/or rest break premiums constitute wages Naranjo also confirmed that premium pay for missed meal and rest breaks should be treated as wages – not penalties. This is notable because it affects an employer’s obligation to include these payments in the employee’s final pay (and of course report these payments on employees’ wage statements).
  4. Recommendations for California employers While the Naranjo decision offers a significant defense for employers, it also serves as a crucial reminder that comprehensive legal review is essential to avoiding potentially significant liability. Therefore, California employers should:
  • Conduct regular audits: Regularly review wage and hour policies and practices to ensure compliance with California’s stringent labor laws.      
  • Seek legal guidance: Consult with trusted legal professionals and experts to verify that current practices and policies are compliant.

By staying up to date and informed, employers can navigate the complexities of California’s wage statement requirements, protect themselves from potential legal issues, and, if needed, preserve their ability to assert a good faith defense under Naranjo.