In a Rare Win for Employers, the California Supreme Court Holds That Wage Statement Penalties Are Not Available if an Employer Acted in Good Faith

Background Facts

The plaintiff, Gustavo Naranjo worked as a security guard for the defendant, Spectrum, and was allegedly fired after leaving his post to take a meal break. In response, Naranjo filed a class action lawsuit asserting wage and hour claims, including an allegation that he was owed meal period premiums and issued incorrect wage statements (i.e., paystubs).

Naranjo sought wage statement penalties, claiming his statements were incorrect because they failed to show the meal period premiums that he should have been paid. Under Labor Code section 226(e), an employee can recover up to $4,000 in penalties if there is a “knowing and intentional” failure to comply with the wage statement requirements.

At trial, Naranjo prevailed on his wage statement claim, gaining penalties for himself and the class. This holding was then reversed by the Court of Appeal. Because state appellate and federal district courts had reached varying conclusions when considering when wage statement penalties may be awarded to an employee, the California Supreme Court granted review to resolve the issue.

California Supreme Court’s Decision

The California Supreme Court affirmed the decision from the Court of Appeal, holding that an “employer’s objectively reasonable, good faith belief that it has provided employees with adequate wage statements precludes an award of penalties under section 226, subdivision (e).” The statute states that penalties should only be awarded where there is a “knowing and intentional failure by and employer” to comply with section 226. Accordingly, the court spent most of its opinion exploring what mental state an employer must have in order to commit a wage statement violation.

To answer this question, the court not only looked at the plain text of the law, but also at the statutory context of its penalty provision. When looking at the context of the provision, the court first noted that the purpose of penalties is not to compensate but rather to deter and punish. Thus, those who proceed on a reasonable and good faith belief that they are complying with the law’s requirements (even if that belief ultimately turns out to be mistaken) do not need to be deterred from repeating their mistake.

The second critical contextual consideration noted by the court was the relationship between section 226 and other Labor Code provisions; specifically, Labor Code section 203, which governs when wages must be paid upon termination of employment and permits an award of penalties where an employer “willfully” fails to pay all wages due. The court explained that claims under sections 226 and 203 are typically raised as derivative claims of other Labor Code violations, as was done in this case. In other words, employees will bring a claim alleging their employer failed to pay wages and, on that basis, will also bring claims for a failure to issue correct wage statements under section 226 and a failure to pay those wages upon termination of employment under section 203. Since the sections 226 and 203 claims typically derive from the same underlying failure to pay a certain type of wages, the court reasoned that it made sense to harmonize how penalties should be awarded under both statutes. Under Labor Code section 203, it has long been the rule that employers may only be penalized if they “willfully” fail to pay wages and that a willful violation does not occur if the employer had a good faith belief that the wages were not owed (even if that belief later turned out to be mistaken). In an effort to harmonize the law in this area, the court adopted the same standard for penalty claims brought under Labor Code section 226.

The court also pointed to the legislature’s intent behind section 226’s penalty provision and found there was no suggestion that the legislature intended for the provision to punish those who make a good faith mistake about what the law requires, but only intended to punish those who “deliberately fail[ed] to provide wage information to their employees.” Naranjo raised concerns, stating that excusing employers from section 226 penalties based on good faith mistakes of law will excuse and incentivize ignorance of the law. The court found these concerns unfounded, explaining that since courts already evaluate an employer’s good faith belief under an objective standard of reasonableness, there was little reason to worry that recognizing a good faith defense to section 226 penalties would create adverse incentives for employers. Agreeing with a conclusion earlier reached by the Ninth Circuit in a case involving wage statements, the court stated the defense will not “reward ignorance of the law,” it only means that penalties will be imposed on those who “lack a good excuse” while employers who face genuine legal uncertainty and make “mistakes of law that are reasonable and supported by evidence will be spared.”

Takeaways for Employers

Naranjo is a rare victory for employers before the California Supreme Court. Following Naranjo, employers will no longer be held liable for penalties under Labor Code section 226 for wage statement violations so long as they had an objectively reasonable and good faith belief that their wage statements complied with the law. Notably, however, the state Supreme Court stated several times in its opinion that employees may still obtain injunctive relief and – very significantly – attorneys’ fees if they demonstrate that an employer provided incorrect wage statements, and employers cannot defeat such claims by relying on a good faith belief defense. As such, all employers are encouraged to regularly review their wage statements with experienced labor and employment counsel to best achieve compliance.