California law requires employers to furnish itemized wage statements (aka pay stubs) to employees that list nine items of information specified in Labor Code Section 226. This includes listing gross and net wages earned, even if such wages are unpaid. It also authorizes an award of penalties for a “knowing and intentional” failure to report required information. The Supreme Court recognized a defense to penalties in its May 6, 2024 decision in Naranjo.

1. Employers Must Promptly Pay And Report Missed-Break Premiums

In 2022, the California Supreme Court examined the requirements of Labor Code Sections 203 (the waiting time penalty statute) and 226 (the wage statement statute) in Naranjo v. Spectrum Security Services, Inc. The employer failed to promptly pay missed-break premiums that were owed when employees separated or report the premiums that were earned but not paid on employees’ wage statements. The Supreme Court found violations of the final pay rules in Labor Code Sections 201 – 203 and the wage statement rules in Section 226, but that did not necessarily mean the employer was liable for penalties. To make that determination, it was still necessary to see whether the employer owed either (1) waiting time penalties under Section 203 for a “willful” violation of the final pay rules or (2) wage statement penalties for a “knowing and intentional” violation under Section 226(e)(1).

2. Penalties Are Not Always Owed For Violations

In the May 6, 2024 decision in Naranjo v. Spectrum Security Services, Inc., __ Cal.5th __ (2024), the Supreme Court recognized defenses to penalty claims under Sections 203 and 226. It concluded, “if an employer reasonably and in good faith believed it was providing a complete and accurate wage statement in compliance with the requirements of section 226, then it has not knowingly and intentionally failed to comply with the wage statement law,” even if that belief was mistaken. Thus, it is not liable for penalties under Section 226(e)(1).

In reaching this conclusion, the Supreme Court recognized a “good faith belief” defense to penalties exists under both Sections 203 and 226. Although the Supreme Court has created a sea of exposure for employers in its wage-hour decisions, Naranjo is certainly a positive development for employers. It identifies potential defenses to wage statement and waiting time penalties that are significant. It also adds a layer to the analysis of potential liability in class action cases that can be cited by employers when opposing class certification.

3. Background

a. The Penalty Feature Of Section 226

Labor Code Section 226 requires employers to provide employees with written pay stubs listing gross and net wages earned, hourly pay rates, hours worked, and other information examined in Section 13.8 of the Wage and Hour Manual for California Employers by Attorney Richard J. Simmons of Sheppard, Mullin, Richter & Hampton. A plaintiff who brings a claim under Section 226 can seek injunctive relief and an award of costs and attorney’s fees.

If an employer is found guilty of a “knowing and intentional” failure to comply, the law provides for statutory penalties of up to $4,000 or the employee’s actual damages if they are higher. Naranjo presented the question of whether an employer has “knowingly and intentionally” failed to comply with Section 226’s requirements when the employer has a good faith, yet erroneous, belief that it was in compliance.

b. The Need To Promptly Pay And Report Missed-Break Premiums

In 2022, the Supreme Court issued a decision in the same case confirming that employers must treat missed-break premiums for depriving meal or rest breaks as wages “earned” both for purposes of (1) penalizing the willful failure to timely pay wages to former employees under Labor Code Section 203 (the final pay/waiting time penalty statute) and (2) the knowing and intentional failure to report wages earned in compliance with Labor Code Section 226 (the wage statement statute). The earlier decision in Naranjo v. Spectrum Security Services, Inc., 13 Cal. 5th 93 (2022) held that employers are required to treat missed-break premium pay as earned wages.

The decision arose from a class action involving meal period claims. It focused on the final pay, waiting time penalty, and wage statement claims arising from missed-break premiums. Even though the employer owed the missed-break premiums, it did not pay them when employees separated and did not report them on wage statements as “gross wages earned” and “net wages earned.” The 2022 decision found that the employer had an obligation to report the wages even though they had not been paid.

c. The Good Faith Belief Defense

The 2024 decision in Naranjo examined the next question – whether the employer was liable for penalties under Section 226 for a “knowing and intentional” violation of the wage statement requirements. The Supreme Court concluded that a good faith belief that the employer provided a compliant wage statement barred penalties under Section 226 just as a good faith belief that the employer paid all wages owed at separation precluded waiting time penalties under Section 203.

The extension of the “good faith belief” defense previously recognized as a bar to Section 203 penalties to Section 226 claims is unquestionably good news for employers and important. Employers are advised to consider the impact of this development in all pending and future lawsuits.

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About The Author

Richard J. Simmons is a Partner in the law firm of Sheppard, Mullin, Richter & Hampton LLP in Los Angeles. He represents employers in various employment law matters involving litigation throughout the country and general advice regarding state and federal wage and hour laws, employment discrimination, wrongful discharge, employee discipline and termination, employee benefits, affirmative action, union representation proceedings, and arbitrations. Mr. Simmons received his B.A., summa cum laude, from the University of Massachusetts, where he was a Commonwealth Scholar and graduated in the Phi Kappa Phi Honor Society. He received his J.D. from Berkeley Law at the University of California at Berkeley where he was the Editor-in-Chief of the Industrial Relations Law Journal, now the Berkeley Journal of Employment and Labor Law.

Mr. Simmons argued the only case before the California Supreme Court that produced a victory for employers and business in 2018. He was recently recognized as the Labor and Employment Attorney of the Year by the Los Angeles Business Journal and was inducted into the Employment Lawyers Hall of Fame. He has lectured nationally on wage and hour, employment discrimination, wrongful termination, and other employment and labor relations matters. He is a member of the National Advisory Board to the Berkeley Journal of Employment and Labor Law, published by Berkeley Law at the University of California at Berkeley. He was also appointed by the California Industrial Welfare Commission as a member of three Minimum Wage Boards for the State of California.