Good Faith Is A Defense To Labor Code’s “Knowing And Intentional” Standard

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On Remand From California Supreme Court, Court Of Appeal Holds That Good Faith Is A Defense To Labor Code’s “Knowing And Intentional” Standard

Naranjo v. Spectrum Sec. Servs., Inc., 88 Cal.App.5th 937 (2023), review granted Naranjo v. Spectrum Security Services, 2023 WL 3745105, at *1 (Cal., 2023)

In California, if an employer unlawfully makes an employee work during all or part of a meal or rest period, the employer must pay the employee an additional hour of pay. Labor Code § 226.7(c). In Naranjo v. Spectrum Security Services, Inc., 40 Cal.App.5th 444 (2019), the Court of Appeal held that this extra pay for missed breaks (commonly referred to as “premium pay”) does not constitute “wages” that must be reported on statutorily required wage statements during employment (§ 226) and paid within statutory deadlines when an employee leaves the job (§ 203).

The Supreme Court reversed that portion of the Court of Appeal’s holding, concluding: “Although the extra pay is designed to compensate for the unlawful deprivation of a guaranteed break, it also compensates for the work the employee performed during the break period. The extra pay thus constitutes wages subject to the same timing and reporting rules as other forms of compensation for work.” Naranjo v. Spectrum Security Services, Inc., 13 Cal.5th 93, 102(2022).

The Supreme Court then remanded the matter to the Court of Appeal to resolve two issues that the parties addressed in their respective appeals but that the Court of Appeal did not reach based on its conclusion about the nature of missed-break premium pay: (1) whether the trial court erred in finding that Spectrum Security Services, Inc. had not acted “willfully” in failing to timely pay employees premium pay (which barred recovery under § 203); and (2) whether Spectrum’s failure to report missed-break premium pay on wage statements was “knowing and intentional,” as is necessary for recovery under section 226.

After receiving supplemental briefing following remand, the Court of Appeal concluded as follows: (1) substantial evidence supports the trial court’s finding that Spectrum presented defenses at trial—in good faith—for its failure to pay meal premiums to departing employees and, therefore, Spectrum’s failure to pay meal premiums was not “willful” under section 203; and (2) because an employer’s good faith belief that it is in compliance with section 226 precludes a finding of a knowing and intentional violation of that statute, the trial court erred by awarding penalties, and the associated attorneys’ fees, under section 226.

The California Supreme Court has granted review.