Naranjo v. Spectrum Sec. Serv., Inc.

547 P.3d 980

320 Cal.Rptr.3d 646

Gustavo NARANJO, et al., Plaintiffs and Appellants,

v.SPECTRUM SECURITY SERVICES, INC., Defendant and Appellant.

S279397

Supreme Court of California.

May 6, 2024

Second Appellate District, Division Four, B256232, Los Angeles County Superior Court, BC372146, Barbara Marie Scheper, Judge

Rosen Marsili Rapp, Howard Z. Rosen, Jason C. Marsili and Brianna Primozic Rapp, Los Angeles, for Plaintiffs and Appellants.

Gusdorff Law and Janet Gusdorff, Westlake Village, for California Employment Lawyers Association as Amicus Curiae on behalf of Plaintiffs and Appellants.

Duane Morris, Robert D. Eassa, Paul J. Killion, San Francisco, Eden E. Anderson, Sarah A. Gilbert, San Diego; Tremblay Beck Law and David Carothers for Defendant and Appellant.

Munger, Tolles & Olson, Benjamin J. Horwich, Aimee Feinberg and Maggie H. Thompson, San Francisco, for Chamber of Commerce of the United States of America and the California Chamber of Commerce as Amici Curiae on behalf of Defendant and Appellant.

Quarles & Brady, George S. Howard, Jr., Jeffrey P. Michalowski and Adrielli Ferrer, San Diego, for Employers Group and the California Employment Law Counsel as Amici Curiae on behalf of Defendant and Appellant.

Opinion of the Court by Kruger, J.

California law requires employers to provide their employees with written wage statements listing gross and net wages earned, hourly pay rates, hours worked, and other employment-related information. (Lab. Code, § 226.) If a claimant demonstrates that an employer has failed to comply with this requirement, the claimant is entitled to an injunction compelling compliance and an award of costs and reasonable attorney’s fees. (Id., subd. (h).) But in the case 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, should the employee’s damages exceed the statutory penalties. (Id., subd. (e)(1).) The question presented is whether an employer has knowingly and intentionally failed to comply with section 226’s requirements when the employer had a good faith, yet erroneous, belief that it was in compliance.

This case returns to us after we resolved a division in state and federal courts about whether the law requires employers to treat certain amounts — premium pay awarded for the deprivation of a lawful meal or rest break — as wages earned for purposes of provisions penalizing the willful failure to timely pay wages to former employees (Lab. Code, § 203) and the knowing and intentional failure to report wages earned in compliance with Labor Code section 226. Answering that question in the affirmative, we held that employers are required to treat missed-break premium pay as wages. We remanded for consideration of whether the requirements for imposing penalties were otherwise satisfied.

[1, 2] On remand, the answer to the question of Labor Code section 203 penalties was clear. Under long established law, an employer cannot incur civil or criminal penalties for the willful nonpayment of wages when the employer reasonably and in good faith disputes that wages are due. (See In re Trombley (1948) 31 Cal.2d 801, 808; Barnhill v. Robert Saunders & Co. (1981) 125 Cal.App.3d 1, 8-9, 177 Cal.Rptr. 803; see also Cal. Code Regs., tit. 8, § 13520.) But courts are divided over whether an employer’s good faith belief will also bar Labor Code section 226 penalties for a knowing and intentional failure to report the same unpaid wages, or any other required information, on a wage statement. We now conclude 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. We affirm the judgment of the Court of Appeal, which reached the same conclusion.

I.

We have previously recounted the factual and procedural background of this case. (Naranjo v. Spectrum Security Services, Inc. (2022) 13 Cal.5th 93, 102-104, 293 Cal. Rptr.3d 599, 509 P.3d 956 (Naranjo III.) We restate the central facts here, adding further background relevant to the issue now before us.

Defendant Spectrum Security Services, Inc. (Spectrum) provides secure custodial services to federal agencies. Spectrum transports and guards prisoners and detainees who require outside medical attention or have other appointments outside custodial facilities. Plaintiff Gustavo Naranjo worked as a guard for Spectrum. Naranjo was suspended and later fired after leaving his post to take a meal break, in violation of a Spectrum policy that required custodial employees to remain on duty during all meal breaks. (Naranjo III, supra, 13 Cal.5th at pp. 102-104, 293 Cal.Rptr.3d 599, 509 P.3d 956.)

Naranjo filed a putative class action on behalf of Spectrum employees, alleging, among other things, that Spectrum had violated state regulations governing meal breaks. (Lab. Code, § 226.7 (section 226.7); Industrial Welf. Com. (IWC) wage order No. 4-2001, § 11.) The complaint sought an additional hour of pay — known as "premium pay" — for each day on which Spectrum failed to provide employees a legally compliant meal break. (See § 226.7, subd. (c); IWC wage order No. 4-2001, §§ 11(B), 12(B).) The complaint further alleged two additional Labor Code violations related to Spectrum’s premium pay obligations: (1) that Spectrum had violated Labor Code sections 201, 202, and 203 by failing to timely pay owed meal break premiums as wages to employees once they were discharged or resigned; and (2) that Spectrum had violated Labor Code section 226 (section 226) by failing to report the premium pay it owed as wages on employees’ wage statements. Among other forms of relief, the complaint sought the statutory penalties prescribed for "willful[ ]" failure to comply with the timely payment requirements (Lab. Code, § 203 (section 203), subd. (a)), and the penalties prescribed for the "knowing and intentional" failure to comply with the wage statement requirements (§ 226, subd. (e)(1)).

In the approximately decade and a half since it was filed, the case has taken a number of turns up and down the court system. The details of its extensive procedural history are not strictly necessary to understand the issues now before us, except as they illuminate the scope and nature of the many debates that have surfaced about Spectrum’s liability for Naranjo’s meal break claims.

At first, the trial court granted summary judgment for Spectrum, ruling that Naranjo’s sole remedy lay in a federal administrative claim procedure for employees of federal contractors. The Court of Appeal disagreed and reversed. (Naranjo v. Spectrum Security Services, Inc. (2009) 172 Cal.App.4th 654, 663, 670, 91 Cal.Rptr.3d 393 (Naranjo I).)

On remand, the trial court certified a class for the meal break and related timely payment and wage statement claims and held a trial in three phases. (Naranjo III, supra, 13 Cal.5th at p. 103, 293 Cal.Rptr.3d 599, 509 P.3d 956; Naranjo v. Spectrum Security Services, Inc. (2023) 88 Cal.App.5th 937, 942, 304 Cal.Rptr.3d 898 (Naranjo IV).) The first phase was a bench trial where Spectrum presented certain affirmative defenses. In particular, Spectrum argued that California meal break requirements did not apply to the class members because they were performing federal functions and because many of them worked on federal properties outside the reach of state regulation. (Naranjo IV, at p. 942, 304 Cal.Rptr.3d 898.) At the end of the first phase, the trial court held that Spectrum failed to carry its burden to establish any of these defenses. (Ibid.)

In the second phase, the section 226.7 meal break claims were tried to a jury. (Naranjo IV, supra, 88 Cal.App.5th at p. 942, 304 Cal.Rptr.3d 898.) The relevant IWC wage order, wage order No. 4-2001, requires employers to give covered employees an off-duty meal period on shifts lasting over five hours. (Ibid., citing IWC wage order No. 4-2001, § 11(A) and Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1034, 139 Cal.Rptr.3d 315, 273 P.3d 513.) Wage order No. 4-2001 recognizes an exception to the off-duty meal period requirement that "allows for ‘ "on duty" ’ meal periods if ‘the nature of the work prevents an employee from being relieved of all duty,’ but only when ‘by written agreement between the parties an on-the-job paid meal period is agreed to.’ " (Naranjo IV, at p. 942, 304 Cal.Rptr.3d 898.) The trial court agreed with Naranjo that Spectrum did not have a valid written on-duty meal break agreement with its employees during part of the class period and directed a verdict for the class on the meal break claim for a period starting in June 2004 and ending in September 2007. (Ibid) The jury, however, found Spectrum not liable for the period starting on October 1, 2007, after Spectrum had issued a memorandum setting forth its on-duty meal break policy and obtained written consent to that policy from employees. (Ibid.)

In the third phase of the trial, the court considered the class’s claims under section 203 and section 226. (Naranjo III, supra, 13 Cal.5th at p. 103, 293 Cal.Rptr.3d 599, 509 P.3d 956.) Spectrum argued that it was not liable under section 203 and section 226 because premium pay awarded under section 226.7 is not "wages" subject to these statutory timing and reporting requirements, but instead a penalty for break violations. Spectrum also argued that even if it had violated an obligation to timely pay and report the premium pay owed, its failure to comply was neither "willful" for purposes of awarding section 203 penalties nor "knowing and intentional" for purposes of awarding section 226 penalties. Spectrum argued that the class could not recover section 203 penalties because it had raised several reasonable defenses in good faith, which, according to Division of Labor Standards Enforcement (DLSE) regulations and governing...