This is the sixth post in our monthly series of CDF’s Labor & Employment Law Blog providing California employers with wage and hour compliance tips and best practices.

Under California Labor Code section 226, an employer, semimonthly or at the time of each payment of wages, must furnish employees an “accurate itemized statement in writing” reflecting, at least, nine specifically delineated items. Commonly referred to as paystubs or wage statements, these perfunctory additions to almost every paycheck seem simple enough and might not garner a second glance from most employees or even the employer. Relying on a third-party payroll provider that automatically generates wage statements is a trap.  Ensuring strict compliance with the requirements of Labor Code section 226 is imperative to avoid potentially costly litigation for California employers, and pointing the finger at the payroll provider as a defense isn’t going to work.

Claims under Labor Code section 226 remain fertile ground for litigation in California on both an individual basis, but perhaps more significantly, on a representative basis through a class action or as an action brought under California’s Private Attorneys General Act (“PAGA”) where the penalties can add up very quickly.  

These claims typically take one of two forms, as (1) a derivative lawsuit, or (2) a direct wage statement violation; and most of these lawsuits, at least at the pleading stage, will contain both. As a derivative lawsuit, the basis of liability is that the employer has violated some wage and hour law (i.e. failure to properly pay for all hours worked or at an incorrect rate), and because of this violation, the resulting wage statement is incorrect in some manner and thus violates Labor Code section 226 such that additional penalties should be awarded. However, as a derivative claim, if no predicate violations are found the derivative claim necessarily fails as well.

The second basis for a claim under Labor Code section 226, a direct wage statement violation, are avoidable by implementing internal compliance checks, and not relying on payroll providers blindly. As a direct violation, the basis of liability is that the wage statement itself fails to satisfy one or more of the nine items required by Labor Code section 226. Since the format of wage statements are generally the same for all employees, a facial violation is low hanging in a class or PAGA action and makes defeating direct wage statement claims in this context very difficult. While California courts are currently split on the potential impact of manageability in a PAGA action, this type of claim does not generally invoke manageability issues because violations are provable based on the face of the records, which are usually quite uniform amongst all employees. Moreover, courts have held that an employee may pursue civil penalties under PAGA for violation of Labor Code section 226 without establishing injury, as set forth in subsection (e) of this code section.  

Needless to say, ensuring compliance with Labor Code section 226 is important for California employers for a variety of reasons, including avoiding costly litigation. Here are what California employers need to keep in mind to ensure compliance.

What must be included on a wage statement:

In accordance with Labor Code section 226, the following information must be furnished (physically or through an electronic copy, but must be in writing) on the wage statement when wages are paid:

1. Gross wages earned; 
2. Total hours worked by the employee, unless certain exemptions apply per subsection (j);
3. The number of piece-rate units earned and any applicable piece rate if the employee is paid on a piece-rate basis;
4. All deductions, provided that all deductions made on written orders of the employee may be aggregated and shown as one item;
5. Net wages earned;
6. The inclusive dates of the period for which the employee is paid;
7. The name of the employee and only the last four digits of his or her social security number or an employee identification number other than a social security number;
8. The name and address of the legal entity that is the employer and, if the employer is a farm labor contractor, the name and address of the legal entity that secured the services of the employer; and 
9. All applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee with certain additional requirements for temporary services employers. 

While these requirements are seemingly straightforward at an initial glance, there are other categories of pay that complicate wage statement compliance, such as differential pay, regular rate of pay calculations, sick pay, vacation/PTO pay, and meal and rest break premiums. Regular and consistent compliance checks by California employers is a must.

Consequences of non-compliant wage statements:

Employees may recover all actual damages or $50 for the initial pay period in which a violation occurs and $100 per employee for each violation in a subsequent pay period, not exceeding an “aggregate penalty” of $4,000, in addition to other equitable relief. Employees may also recover costs and reasonable attorney fees. Moreover, an employer who violates Labor Code section 226 may be subject to civil penalties under PAGA. In a class or PAGA action, these amounts can add up quickly. 

Why employers should not rely on payroll providers blindly:

Employers cannot and should not just assume that their payroll provider has gotten it right when it comes to their employee’s wage statements. The California Labor Code holds the employer responsible for accurate wage statements and this responsibility cannot be passed on to the payroll company. Significantly in 2019, the Supreme Court of California in Goonewardene v. ADP, LLC, 6 Cal. 5th 817 (2019), held that payroll service providers do not owe a duty of care to employees to ensure the California Labor Code and wage orders are followed.

Therefore, California employers are strongly urged to take a close look at their wage statements, regardless of whether generated by a third-party payroll provider, and review the specific requirements of Labor Code section 226 to ensure compliance. Getting this right is extremely important and a seemingly innocuous omission or highly technical inaccuracy can result in very costly litigation, damages, and penalties that may be otherwise avoidable.