Naranjo v Spectrum Security Services, Inc., part two: Key points for employers

In its recent decision in Naranjo v Spectrum Security Services, Inc., the California Supreme Court ended its recent string of pro-employee decisions and confirmed that a defendant may not be liable for wage statement penalties if it “reasonably and in good faith believed it was providing a complete and accurate wage statement in compliance with" Labor Code section 226.

While the Court’s decision does not lessen the need for California employers to pay close attention to compliance with Labor Code requirements, it does provide an important defense to wage statement claims. 

Background 

In May 2022, we reported on the California Supreme Court’s decision in Naranjo v Spectrum Security Services, Inc., 13 Cal.5th 93 (2022) (Naranjo I).  In that case, the court was asked to decide whether a claim for failure to pay meal and rest period premiums could also support a claim for failure to provide accurate wage statements and/or failure to pay all wages due at the time of termination.  The court resolved an apparent conflict in the lower courts, holding that a claim for failure to provide meal and rest periods can support claims for derivative wage statement and waiting time penalties because the remedy for the failure to provide meal and rest periods was the payment of wages. 

Importantly, the court expressly declined to decide whether the defendant could be liable for wage statement and waiting penalties because the Court of Appeal had not considered (1) the plaintiff’s argument that the trial court erred in finding that the defendant had not acted willfully for purposes of Labor Code section 203 or (2) the defendant’s argument that its failure to report meal and rest break premiums on its wage statements was not “knowing and intentional” for purposes of Labor Code section 226.

After the case was remanded, the Court of Appeal concluded, in accordance with longstanding precedent, that a defendant may not be liable for waiting time penalties if and when there is a good-faith dispute about whether certain wages are due at the time of termination.  However, there was no similar precedent regarding an employer’s potential liability for wage statement penalties.  Rather, there was a split of authority among state and federal courts regarding whether the good-faith defense also applied to claims for wage statement penalties.  

The California Supreme Court’s decision 

On May 6, 2024, in its second decision in the Naranjo v Spectrum Security Services, Inc. case (Naranjo II), the California Supreme Court held that a defendant may not be liable for wage statement penalties if it “reasonably and in good faith believed it was providing a complete and accurate wage statement in compliance with" Labor Code section 226.  

The Naranjo II court noted that Labor Code section 226 provides for statutory penalties when an employer commits a “knowing and intentional” violation of its reporting obligations.  The court reasoned that the purpose of the penalty provision in section 226 is to “punish,” and generally, the law will only punish individuals who knowingly and intentionally violate the law.  If an employer issues a wage statement that the employer reasonably and in good faith believes is accurate, there is no basis to punish that employer.  

The court also reasoned that waiting time and wage statement penalties are designed to address the same type of conduct (ie, willful or intentional violations of the law).  Because there is a good-faith defense to a claim for failure to pay all wages due at the time of termination, there should also be a good-faith defense to a claim for failure to provide accurate wage statements.  

Finally, in affirming the decision that the defendant had a valid good-faith defense to the wage statement penalty claim, the Naranjo II court provided a lengthy summary of the various trial court and appellate court decisions finding for and against the defendant on several issues in the case.  Based on ambiguities in existing law, the court concluded that the defendant had a good-faith belief that it had been issuing accurate wage statements. 

Implications for employers

As noted, notwithstanding the court’s decision in Naranjo II, California employers are encouraged to pay close attention to Labor Code section 226’s wage statement requirements, as failure to fully comply can still expose employers to statutory and civil penalties.  However, Naranjo II does provide an important defense to wage statement claims if the employer can demonstrate that it had a good-faith belief, based on facts or the law, that it issued accurate wage statements.

We will continue to monitor wage and hour developments for employers operating in California. Please reach out to the authors or your DLA Piper contact if you have questions about the Naranjo decision and how it may impact your business or wage and hour policies and practices generally.