In a significant victory for employers, the California Supreme Court recently held that if an employer reasonably and in good faith believed it was providing complete and accurate wage statements in compliance with wage statement requirements (Labor Code § 226), then it has not knowingly and intentionally failed to comply with the wage statement law. This reasonable and good faith belief precludes an award of penalties under Labor Code section 226, and takes one additional set of penalties out of the equation in wage-and-hour cases.

This ruling, which affirmed the Court of Appeal ruling in Naranjo v. Spectrum Security Services, Inc. (here) provides employers with a defense to wage statement claims for penalties based on the employer’s good faith belief that the wage statements were accurate.

Procedural Background

In May 2022, the California Supreme Court held that meal and rest penalties (i.e. premium pay) constitute “wages” for purposes of wage statement violations and waiting time penalties (“Naranjo I”), and remanded two questions to the Court of Appeal for consideration: (1) whether the trial court erred in finding Spectrum had not acted “willfully” in failing to timely pay employees premium pay (which barred waiting time penalties); and (2) whether Spectrum’s failure to report missed break premium pay on wage statements was “knowing and intentional,” as is necessary for recovery of wage statement violations (“Naranjo II”).

The Court of Appeal held that the evidentiary record supported Spectrum’s argument that it had “good faith” defenses for failing to pay premiums to separating employees. Therefore, the failure to pay premiums upon separation were not “willful” and did not warrant “waiting time penalties” (i.e., Spectrum was not required to pay the employee-plaintiff 30 days’ pay for failing to pay premiums owing at the time of separation). Additionally, and pertinent to the most recent ruling at hand, the Court of Appeal held that because Spectrum had a “good-faith belief” that it was complying with the wage statement laws, Spectrum was not liable for “knowing and intentional” wage statement violations. The Court of Appeal’s holding allowed employers to make the argument that they have a “good faith dispute” defense to wage statement violations. You can read more about that ruling here.

Naranjo sought review of that ruling, and for the second time, the California Supreme Court issued an employer-friendly ruling.

The California Supreme Court Decision

The California Supreme Court was faced with a single question: Can employers rely on a good-faith belief defense to wage statement violations when they have a good faith, yet erroneous, belief that they were complying with the law?

The Supreme Court answered with a resounding YES—holding that “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.”

The Court applied the statutory language in a straightforward manner and concluded that California’s wage statement law (specifically, Labor Code section 226, subdivision (e)(1)) is best read to allow for a defense based on an employer’s good-faith belief they were in compliance with the law. The court based its decision on several points:   

First, the operative “knowing and intentional” language does not appear in a liability provision, but instead in a penalty provision. This distinction is of consequence.   

As the Court put it: “the purpose of asking whether the employer has knowingly and intentionally failed to comply with the requirements of section 226 is not to determine whether or not the employer has, in fact, violated the statute” because “an employer who issues incomplete wage statements is not complying with the statute,” and “an employee who can so demonstrate in court is entitled to remedies consisting of injunctive relief, costs, and reasonable attorney’s fees.” Instead, the Court focused the question on “whether the employee is also entitled to an additional monetary remedy in the nature of penalties for knowing and intentional noncompliance.” In analogizing the showing required for penalties under section 226 to punitive damages and the willful standard required for waiting time penalties, and the defenses thereto, the Court held that the penalty provision of section 226 (requiring a “knowing and intentional” violation) gave rise to a broader “good faith” defense.

Second, the Court considered the relationship between section 226 and other provisions of the Labor Code; for example, the Court acknowledged that an employer’s good-faith mistake about whether certain amounts are owed to an employee when issuing wage statements, which would result in inaccurate wage statements, frequently gives rise to derivative claims and associated remedies. The Court nonetheless concluded that section 226’s penalty provision was designed to avoid penalizing an employer who reasonably and in good faith disputes that it is required to report certain amounts as wages or otherwise disputes its obligation to craft its wage statements in a particular manner.

Key Takeaways for Employers

California employers can now add a “good-faith” defense to their arsenal in combatting wage statement claims. As the Supreme Court made clear, employers who “face genuine legal uncertainty and make mistakes of law that are reasonable and supported by evidence” may not be subjected to penalties. While the outer limits of this newly solidified defense are not established, employers should assert this defense early and often.

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