Naranjo v. Spectrum Security Services: A Good Faith Defense Against Labor Code Claims

 By James Torres

On May 6, 2024, the California Supreme Court decided that penalties under Labor Code section 226 for failing to provide employees with correct wage statements (maxing out at $4,000 for each employee) are precluded when an employer has an objectively reasonable, good faith belief that it has provided employees with adequate wage statements. Will this be the safe harbor for employers that many practitioners will claim?

In Naranjo v. Spectrum Security Services, the California Supreme Court took up an issue that divided courts in California and vexed employers facing penalties for wage statement violations: What must be shown to demonstrate “a knowing and intentional failure by an employer to comply with [section 226,] subdivision (a)” (§ 226, subd. (e)(1))? This is the showing required for an employee to be awarded a maximum penalty of $4,000 against an employer.  

Under the approach that favored employees, courts determined whether an employer’s failure to comply with wage statement requirements was knowing and intentional by asking whether the employer was aware of the “factual predicate” constituting the violation, meaning a failure to comply with section 226 was knowing and intentional if the employer was aware of the underlying facts giving rise to its violation of section 226, subdivision (a) and the violation was not the product of a clerical error or inadvertent mistake. This was akin to a general intent requirement under criminal law—it was irrelevant whether an employer knew or should have known that it was required to act differently.

The employer friendly approach required a showing that the employer knew that it was required to include certain information in wage statements but still failed to include that information in the wage statements that it provided employees.

The California Supreme Court held that “an employer’s objectively reasonable, good faith belief that it has provided employees with adequate wage statements precludes an award of penalties under section 226, subdivision (e)(1). An employer that believes reasonably and in good faith, albeit mistakenly, that it has complied with wage statement requirements does not fail to comply with those requirements knowingly and intentionally.”

On its face, this appears to be a significant development that may shield against most claims for wage statement penalties; however, the Naranjo ruling was highly dependent on the specific facts presented in the case, which clearly indicate that an “objectively reasonable, good faith belief” requires a showing that there was actual uncertainly in the law. In determining that the employer had a reasonable, good faith basis for believing it was complying with California wage and hour law, the Court observed that “over the more than 15 years this case has been pending, Spectrum has succeeded with its legal defenses more than once — even though the decisions in its favor would later be overturned on appeal.” Indeed, the legal requirement at issue—whether unpaid premiums for missed meal breaks must be reported as “wages earned” and credited as “hours worked” in wage statements—was “uncertain” untiluntil the California Supreme Court settled the issue in 2022 in the same case (Naranjo III). The Court repeatedly raises the “uncertainty” in the law (often born of “conflicting case law”) as the barometer for determining that the employer had a good faith, reasonable belief that it was in compliance: “As our discussion makes clear, Naranjo’s claims raised several complex and previously unsettled legal questions, the answers to which do not turn on the content of the wage orders.”[1] Employers must show that there was real uncertainly in the law to mount a successful ‘good faith belief’ defense.   

The Court underscores the limits of the ‘good faith belief’ defense by assuaging “concerns that excusing employers from section 226 penalties based on good faith mistakes of law will excuse and even incentivize ignorance of the law. These concerns are unfounded.” The Court reminds us of the “general rule” that “where the law is clear and thus can easily be ascertained, knowledge of the law may be fairly imputed to an employer” and “actual awareness of the law is unnecessary to establish willfulness. Knowledge is imputed” (internal citations omitted.) The Court goes on to analyze the parallel defense offered against waiting time penalties under Labor Code section 203, explaining that showings of “conflicting case law” or “unclear” law are required. The Court further approved of cases illustrating instances where this defense has failed, including when an employer “negligently failed to inquire into living wage increases under an amended ordinance”. The Court’s bottom line is clear: “the defense does not ‘reward ignorance of the law’; it only means that penalties will be imposed on ‘employers who lack a good excuse’ while employers who face genuine legal uncertainty and make mistakes of law that are reasonable and supported by evidence will be spared.” (emphasis added).

Naranjo has certainly changed the landscape by limiting the availability of penalties for 226 wage statement claims in such a way that an employer will not be liable merely because it was aware of the “factual predicate” constituting the violation; however, this limitation should not be overstated. Ignorance of settled law is not a defense. It will be difficult to meet the required showing that an area of law at issue must be tangled in conflicting case law or so unclear that it creates uncertainly in the law. Employers should take care to follow California’s wage and hour laws.

[1] In other words, if the answer did turn on the content of the wage orders, for example, the ‘good faith belief’ defense would be unsupported.

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