Good Faith Defense Defeats Penalties on California Break Issues

In a win for employers in the latest opinion in the case, the California Court of Appeal held that the employer’s “good faith dispute” defense precluded costly penalties for both waiting time and wage statement claims. The decision demonstrates that – depending on the facts in a case – California employers have a real and viable defense to these claims.

Previously in Naranjo

As we wrote last year, the California Supreme Court held in Naranjo that Labor Code section 226.7(c)’s premium pay constitutes “wages” within the meaning of the waiting time and wage statement penalty laws. It resolved uncertainty following another decision from the Supreme Court holding that a claim for unpaid premium pay is not an “action brought for the nonpayment of wages” for which a court may award attorney’s fees to the prevailing party under Labor Code section 218.5(a). Thus, after Naranjo, the Supreme Court held that meal and rest period premium pay constitutes “wages” for purposes of a longer statute of limitations and possible recovery of waiting time and wage statement penalties, but not for the possible recovery of attorney’s fees and costs.

In Naranjo, the Supreme Court’s conclusion that the plaintiff could pursue these penalties was not the end of the matter. It remanded the case to have the lower court rule on the employer’s defenses to the penalties, as the Court of Appeal did not reach those issues previously. The issues were whether (1) the employer’s failure to pay premium pay was “willful,” triggering waiting time penalties under Labor Code section 203, and (2) the omission of premium pay from wage statements (because it was not paid) was a “knowing and intentional” violation under Labor Code section 226.

Good Faith Defense Precludes Waiting Time Penalties

Labor Code section 203, subdivision (a) imposes waiting time penalties of up to 30 days’ wages if an employer “willfully” fails to timely pay any wages upon the end of employment. In Barnhill v. Robert Saunders & Co., 125 Cal.App.3d 1, the California Court of Appeal held that an employer’s failure to pay is not “willful” under the law if it had a good faith belief that it complied with the law at the time. Id. at 8-9. In 1988, the Labor Commissioner memorialized Barnhill’s holding in a regulation. It provides a “willful” failure to pay wages occurs when an employer “intentionally fails to pay wages to an employee when those wages are due,” but that “a good faith dispute that any wages are due will preclude the imposition of waiting time penalties.” (Cal. Code Regs., tit. 8, § 13520). 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.” Id. Importantly, the regulation provides that an unsuccessful defense “will not preclude a finding that a good faith dispute did exist.” Id. Rather, defenses that, “under all the circumstances, are unsupported by any evidence, are unreasonable, or are presented in bad faith, will preclude a finding of a ‘good faith dispute.’” Id. In the latest Naranjo decision, the Court held that courts properly apply the Labor Commissioner’s regulation to waiting time penalty claims filed in court.

In Naranjo, the Court of Appeal affirmed the trial court’s finding that the employer’s failure to pay premium pay for meal periods was not “willful” and precluded waiting time penalties. The company argued that its employees performed work on a federal enclave or performed federal functions – which, if correct, meant that California law did not apply.

Although the trial court rejected this defense and found the employer liable for meal period premium pay, it found a good faith dispute. The Court of Appeal concluded that the employees failed to show a lack of evidence supporting that determination. They incorrectly pointed to the trial court’s findings that the employer failed to establish its defenses – a different issue. Applying the regulation, the Court of Appeal emphasized that “only defenses which are ‘unsupported by any evidence’ preclude a finding of a good faith dispute.” To the contrary, in this case, the employer presented testimony and argument that demonstrated a good faith dispute – and was sufficient to avoid waiting time penalties.

No “Knowing and Intentional” Violation for Wage Statement Penalties

Under Labor Code section 226, subdivision (a), employers must provide employees with wage statements containing nine specific categories items of information, including all wages earned. Under Naranjo, premium pay thus must appear on wage statements as well. The law allows an employee “suffering injury as a result of a knowing and intentional failure” to include all information as required to recover the greater of actual damages or statutory penalties, up to $4,000. See Labor Code § 226, subd. (e)(1).

In Naranjo, the employer failed to include meal period premium pay on wage statements because it did not pay such premium pay – nor did it believe it owed such pay. The company argued that its failure to include the pay on wage statements was not “knowing and intentional” because of its good faith belief it did not owe those wages.

Carrying over its conclusion on the related waiting time penalty claim, Court of Appeal concluded that an employer’s good faith belief that it does not owe wages also can preclude imposing wage statement penalties. The court concluded that “knowing and intentional” has a meaning similar to “willful” in this context. It rejected the employee’s argument that simply providing an inadequate wage statement not resulting from a clerical error or inadvertent mistake. According to the court, this approach improperly would ignore the “mental state” implicated by the phrase “knowing and intentional” in the law. Thus, based on the good faith dispute finding on the waiting time penalty claim, the Court of Appeal reversed the trial court’s imposition of wage statement penalties.

Employer Takeaways

The latest Naranjo decision is significant in recognizing and applying employers’ defenses to waiting time and wage statement penalties related to premium pay for meal and rest periods. It leaves no doubt that these penalties are not automatic. Rather, the good faith dispute defense is actual and viable, depending on the facts and evidence in a particular case. The decision also is important as a published California decision shedding light on the meaning of a “knowing and intentional” violation under the wage statement law.

Nevertheless, rather than having to argue against such penalties, the better course for employers is seeking to comply with meal and rest break requirements. Those steps may avoid any claims in the first instance. If not, legitimate actions to comply and maintain compliance also can serve as a basis for arguing the existence of a good faith dispute over whether an employer owes these penalties on top of any premium pay in the event of a claim.