California employers now face derivative liability for failing to list premium payments for meal periods or rest breaks on their wage statements, as well as for failing to pay all premiums timely upon separation.

On May 23, 2022, the California Supreme Court delivered another blow to employers by overturning an employer-friendly ruling from the Second District in Naranjo v. Spectrum Security Services, Inc. The California Supreme Court held that unpaid premium wages for meal and rest period violations now entitle employees to wage statement penalties and waiting time penalties. These same violations can also trigger civil penalties under the Private Attorneys General Act (PAGA). Accordingly, the stakes for employers with meal and rest premium violations has just increased significantly.

Background Law

Meal Periods and Rest Breaks: Both the California Labor Code and Industrial Wage Commission Wage Orders (Nos. 1-15) set out the rules for meal periods and rest breaks. (For a breakdown of the meal period and rest break rules, please click here.) Generally, employers must “provide” timely, off-duty meal periods and “authorize and permit” timely, off-duty rest breaks to employees based on the length of their shifts.

Premium Pay: If an employer fails to comply with the meal period and rest break rules, they must pay one hour of “premium” pay. (For more information on how it is calculated, click here.)

Wage Statements: Labor Code section 226 requires certain categories of information be included on wage statements and makes employers liable for failing to list each category of information.

Waiting Time Penalties: Labor Code section 203 requires employers to timely pay all wages due to an employee who separates and makes the employer liable for a full day’s wages for each day they willfully do not pay the employee (up to 30 days).

PAGA: In addition to underlying damages and statutory penalties, employers may also be liable for civil penalties for each pay period where a violation occurs.

Derivative Liability: Any violations or penalties resulting from a different, underlying violation, such as wage statement violations flowing from failing to list premium pay on wage statements, is commonly referred to as “derivative” liability.

The Issue: Does Failure to List Premium Pay on Wage Statements Trigger Wage Statement Violations and Waiting Time Penalties?

Spectrum Security Services, Inc. (Spectrum) works with federal agencies to take temporary custody of prisoners and detainees in order to transport them offsite for treatment and appointments. Spectrum employees are on-call, hourly employees who were classified as non-exempt.

Spectrum had a policy and practice of requiring paid, on-duty meal periods. Spectrum’s handbooks described this rule but did not provide for a procedure for employees to opt out of on-duty meal periods. Spectrum paid employees for their on-duty meal break but did not pay the one-hour premium for a noncompliant meal break policy which did not include a revocation clause. Plaintiff Gustavo Naranjo filed a lawsuit against Spectrum claiming that its practice was unlawful. After the lawsuit was initiated, Spectrum issued a memorandum to employees instructing them to take the breaks but that such breaks were [still] on-duty. The memorandum required that employees sign and agree to the on-duty breaks, but allowed them to revoke the agreement at their discretion.

Naranjo was separated for leaving his post for a meal period. In his lawsuit, Naranjo sought, among other things, damages for Spectrum’s failure to list premium pay on his wage statements and failing to pay premium pay timely upon his separation.

The Trial Court’s Ruling:

Naranjo brought a class action for Labor Code violations against Spectrum, including for failing to provide meal periods and rest breaks, wage statement violations and rest break premiums. The trial court denied class certification to the rest break claims. The trial court issued a directed verdict against Spectrum for all employees who were working prior to the memorandum (allowing employees to revoke the on-duty meal period agreement). However, for employees working after the issued memorandum, a jury found Spectrum was not liable. So, Spectrum was liable only for pre-memorandum employees for its failure to pay premium pay owing. The trial court conducted a bench trial to determine whether its failure to provide premium pay (due to Spectrum failing to provide compliant meal periods) also gave rise to wage statement violations and waiting time penalties. The trial court relied on the California Supreme Court’s ruling in Murphy v. Kenneth Cole Productions, Inc., where it held that premium pay was a wage and not a penalty (for unrelated statute of limitations purposes). Interpreting the California Supreme Court’s ruling to mean that premium pay is tantamount to wages, the trial court extended the same rationale to wage statement violations and waiting time penalties. The trial court ruled for Naranjo, stating that Spectrum’s failure to list meal premium pay (i.e. wages) was a wage statement violation. The trial court did find that Spectrum’s failure to pay premium pay at the end of employment was not “willful” (as required by the statute).

The Now-Overturned Court of Appeals’ Holding:

Both Spectrum and Naranjo appealed to the Court of Appeal for the Second Appellate District (Case No. B256232). In appealing, Spectrum challenged its liability for wage statement violations based on its failure to list premium pay on its wage statements. Naranjo challenged the trial court’s denial of waiting time penalties. Naranjo also challenged the trial court’s denial of certification of the rest break class.

In evaluating whether the meal period violations give rise to wage statement violations, the Second District Court began its analysis by noting the confusion created by the California Supreme Court in its holdings in Murphy v. Kenneth Cole (premium pay is wages for statute of limitation purposes) and Kirby v. Immoos Fire Protection, Inc. (where it held that an action for wage statement violations for not providing meal periods and rest breaks is not an action for the nonpayment of wages, and thus a prevailing party is not entitled to attorneys’ fees).

The Second District agreed with Spectrum and overruled the trial court, holding that meal period and rest break violations do not give rise to derivative liability for wage statement claims. The Second District reasoned that premium pay “is a statutory remedy for an employer’s conduct, not an amount ‘earned’ for ‘labor, work, or service … performed personally by the [employee].’” That is, the Second District ruled that premium pay is not tantamount to “wages,” so it does not need to be listed on wage statements.

The Second District also noted there was a split amongst appellate courts with respect to whether employers are liable for waiting time penalties for unpaid premium pay. The Second District sided with Spectrum, holding that it did not willfully fail to pay wages upon separation. The Second District reasoned that waiting time penalties “penalize[ ] an employer that willfully fails ‘to pay… any wages’ owed to a fired or voluntarily separating employee.” The Second District again focused on the intention behind the statutes—to penalize an employer rather than to compensate a worker for unpaid wages.

The New Law of the Land:

The case was appealed to the California Supreme Court. (Ruling here; briefs here; oral argument video here.) In a ruling adverse to employers, the California Supreme Court overturned the Second District and held that: (1) employers are liable for wage statement violations for failing to list premium pay on wage statements; and (2) employers are liable for waiting time penalties for failing to timely pay premium pay upon separation.

The Supreme Court reasoned that premium pay, even though designed to compensate for the deprivation of the right to breaks, also compensates employees for the work they performed during the break period. The court took the same view it did in Murphy v. Kenneth Cole and held premium pay to be tantamount to wages. The court explained “the premium pay due for the deprivation [of meal periods and rest breaks] is certainly designed to compensate employees for hardships the Legislature concluded employees should not be made to suffer. But when those hardships include rendering work, the pay owed can equally be viewed as wages.” The court reiterated that premium pay is “a wage to compensate employees for the work” they performed during a meal or rest period and analogized the missed-break premium pay to other forms of enhanced payment for working under conditions of hardship, such as overtime. Notably, the court rejected Spectrum’s interpretation of Kirby v. Immoos and expressly disclaimed any prior, contrary ruling in Ling v. P.F. Chang’s China Bistro, Inc. Employers must now consider and treat premium pay as wages.

Of course, Naranjo leaves certain questions unanswered. For example, the court emphasized that Labor Code 226 requires wage statements to list all hours “worked,” and then goes on to create a new term to describe premium wages: “credited hours worked.” This is a new brand of wages not enumerated anywhere in the Labor Code or legislative history, and is a term that is likely going to spur additional litigation and confusion.

What Employers Must Immediately Do

Employers face a wider range of exposure and liability as a result of the Naranjo holding. Employers likely will see an uptick in wage statement and waiting time penalty claims. Employers should anticipate that plaintiffs will attempt to add these claims to pending lawsuits alleging meal period and rest break violations—especially in the class action and PAGA context.

Going forward, employers should promptly take some simple, but important, steps:

• Confirm that California paystubs include separate line items for meal premium and rest premium.
• Confirm that meal and rest premium pay are properly calculated at the “regular rate of pay.” (Click here for how to calculate the “regular rate.”)
• Consider obtaining meal period and rest break acknowledgments throughout employment and/or upon separation.
• Confirm final pay to all separating employees is accurate, given there are now more ways to trigger waiting time penalties for getting it wrong.
• In fact, if necessary, consider delaying formal separation to ensure final pay is accurate.

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