March 23, 2023

Good Faith Defense Precludes Final Pay and Wage Statement Penalties

4 min

The California Court of Appeal recently issued an opinion that brings good news to employers in connection with California's draconian penalties for late payment of final wages. In Naranjo v. Spectrum Security Services, Inc. ("Naranjo"), a California appellate court found that if a "good faith dispute" exists as to whether wages are due to an employee, an employee cannot recover and the employer is not liable for late pay penalties (known as "waiting time penalties") in connection with an employer's payment of final wages.

Naranjo has a long history, dating back to 2007. This latest iteration of the case stems from a May 2022 California Supreme Court decision (Naranjo v. Spectrum Security Services, Inc., 13 Cal.5th 93 (2022)) finding that penalties paid for missed meal breaks constitute "wages" and, therefore, must be reported on the employee's wage statements (Labor Code Section 226) and paid within a certain time upon the employee's discharge or resignation (Labor Code Section 203).

The Supreme Court noted that Sections 203 and 226 allow the employee to sue for statutory penalties if the employer fails to comply with these requirements. Section 203(a) imposes penalties of up to 30 days if an employer "willfully" fails to pay any wages owed at the end of employment. Section 226 imposes penalties if an employer's failure to report certain categories of information, including missed-break premium wages, on an employee's wage statements is "knowing and intentional." Section 226 also authorizes the recovery of attorneys' fees.

The Supreme Court then remanded the case to the Court of Appeal to resolve two issues: (1) whether the trial court erred in finding the employer (Spectrum) had not acted "willfully" in failing to pay premium wages in compliance with the Labor Code (which barred recovery of penalties under Section 203); and (2) whether Spectrum's failure to report the premium wages on wage statements was "knowing and intentional" (which is required for recovery of penalties under Section 206).

The Court of Appeal affirmed the trial court's finding that Spectrum did not owe any waiting time penalties under Section 203, because of Spectrum's good faith belief that it did not owe any premium wages. California Code of Regulation Section 13520, which defines a "willful" failure for purposes of Section 203, instructs that a "good faith dispute" that any wages are due precludes imposition of waiting time penalties. A "good faith dispute" occurs when an employer "presents a defense, based in law or fact which, if successful, would preclude any recovery on the part of the employee." Moreover, the fact that the defense is ultimately unsuccessful does not preclude a finding that a good faith dispute existed. Only defenses that "are unsupported by any evidence, are unreasonable, or are presented in bad faith" will preclude a finding of a good faith dispute. The Court agreed that, under this applicable regulation, Spectrum's defenses at trial were presented in good faith, and, therefore, Spectrum did not "willfully" fail to pay wages in compliance with the Labor Code.

As to the second issue, the Court concluded that Section 203's "willful" standard is the same as Section 226's "knowing and intentional" standard, such that an employer's good faith belief that it is not violating Section 226 precludes a finding of a "knowing and intentional" violation. The Court reiterated that the trial court properly found that Spectrum had a good faith belief that it did not owe any premium wages and explained that this finding precluded both a "willfulness" finding under Section 203 and a "knowing and intentional" finding under Section 226. Consequently, the Court reversed the trial court's award of penalties and attorneys' fees under Section 226.

What does Naranjo mean for employers?

This latest Naranjo decision is good news for employers, as it provides them with a viable defense against claims for wage and hour penalties. That said, the defense's applicability will depend on each case's unique set of facts. Ultimately, employers should continue to seek to comply with all wage and hour requirements and ensure that final wages owed are paid in accordance with California law.

Employers who have questions about this recent decision and/or the Labor Code provisions at issue in the case can reach out to the authors of this article and/or any other attorneys in Venable's Labor and Employment Group in California.