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Navigating California Wage Statement Penalties After Naranjo v. Spectrum Security Services, Inc.

May 10, 2024 Articles

On May 6, 2024, the California Supreme Court, in Naranjo v. Spectrum Security Services, Inc., clarified that an employer is not liable for statutory penalties for inaccurate wage statements when it had a good faith and reasonable belief that the issued statements were accurate. The Court's holding offers employers a mechanism to avoid penalties reserved for a “knowing and intentional” failure to report accurate wage statements in California wage and hour class actions.

What Are an Employers’ Duties? Cal. Labor Code Section 226 requires employers to issue earnings statements to employees that include, among other items, the pay period, gross and net wages earned, all applicable hourly rates, and the corresponding number of hours (full list here). Employees (most often on a class basis) can seek hefty statutory penalties if an employer “knowingly and intentionally” failed to issue accurately recorded pay statements.

When Does This Issue Commonly Arise? Often, employers face claims of Cal. Labor Code Section 226 wage statement reporting violations when a putative class of employees aver that the company has failed to pay wages or missed break premiums. Consequently, the earning statements may be inaccurate because they reflect the employees’ actual compensation, and not the amounts employees aver or a court concludes the employees should have been paid. In other words, pay statement violation claims are often derivative of the underlying wage and hour claims, and do not arise from the employers’ failure to accurately reflect the amounts paid to employees at the time. Nonetheless, in the past decade, these derivative claims have cost employers additional millions of dollars in class action wage and hour lawsuits.

In Naranjo, a security guard brought a putative class action for employer Spectrum’s failure to pay and report premiums for missed meal and rest breaks. Due to the job nature, security guards were required to take “on-duty” meal and rest breaks to escort incarcerated individuals to appointments outside custodial facilities. In prior proceedings, the court found that Spectrum owed wages for unpaid premiums for missed meal and rest breaks. So, Spectrum faced potential penalties under Section 226 because its earnings statements did not record the unpaid premiums. The California Supreme Court answered the Section 226 penalties question by first analyzing what qualifies as a “knowing and intentional” failure to accurately record earnings. (Spoiler alert, the Court concluded Spectrum did not intentionally fail to accurately record earnings).

What Is a “Knowing and Intentional” Failure? First, the California Supreme Court has made clear that isolated and unintentional payroll errors are not “knowing and intentional” errors. But, in most instances where the inaccurate wage statements are due to underlying wage and hour violations, the Court will review whether the employer “reasonably and in good faith, albeit mistakenly,” believed it complied with the law. This inquiry is fact-specific.

How Can Employers Best Defend? To avoid Section 226 penalties, an employer will have to show that it made a good faith effort to comply with contemporaneous wage and hour laws. For example, in Naranjo, the Court agreed with employer Spectrum that it failed to record meal premiums as “wages” at a time when the law was unresolved as to whether break premiums classified as “wages.” As such, a court may find an employer’s inaccurate pay statements were not knowing and intentional when the law governing the underlying wage claim or recording requirements is unsettled (even when the employer’s practice is ultimately found to be unlawful).

To ensure compliance, employers should:

Regularly review legal publications and the California Labor Commissioner’s Office website for wage and hour law updates.

Audit earning statements practices to ensure compliance.

  • Consult with your third party vendor if you contract out your payroll services.

Audit company employment policies and practices particularly for “hotbed” wage and hour issues that will ultimately impact what information must be recorded on wage statements. Examples include:

  • Timekeeping practices – ensure timekeeping procedures are as precise as possible and do not involve rounding.
  • Meal and rest break compliance – set policies and practices in place to ensure strict compliance.
    • Accurately record meal and rest break premiums when any are missed by a non-exempt employee.
    • Review meal break waivers for legal compliance.
  • Regularly audit any roles classified as exempt to reduce risk of misclassification.

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