Earlier this week, the California Supreme Court added another layer of complexity to California’s already-onerous wage and hour regulatory scheme. In this week’s development, the California Supreme Court held in Naranjo v. Spectrum Security Services, Inc., that premiums for missed meal periods now constitute “wages” that must be reported on statutorily required wage statements pursuant to Labor Code section 226.7 and paid in a timely manner pursuant to Labor Code section 203.  

Background

The dispute arose when Gustavo Naranjo was terminated from his position at Spectrum Security Services, Inc., (Spectrum) after he abandoned his post as a guard to take a meal break, which violated Spectrum’s policy requiring on-duty meal breaks.  Naranjo filed a putative class action on behalf of other Spectrum employees, asserting that Spectrum violated California’s meal break requirements and seeking an additional hour of pay for each day Spectrum failed to comply with California’s meal break requirements.  Naranjo also asserted claims that Spectrum failed to include said meal break premiums on wage statements in violation of Labor Code section 226 and failed to pay all meal break premiums owed upon termination in violation of Labor Code section 203. 

The primary issue on appeal to the California Supreme Court was whether the meal break premium payment should be defined as a “wage” or a “penalty” such that they must be reported as wages on wage statements under Labor Code section 226 and paid timely upon termination under Labor Code section 203.  Up until this week, wage statement penalties were generally understood to be a penalty.

The Decision

Prior to the California Supreme Court’s decision, the Second District of the California Court of Appeal had come to a much different conclusion.  In interpreting Labor Code section 203 (which provides for penalties against employers who willful fail to timely compensate employees), the Court of Appeal held that meal break premiums could not form the basis of a Labor Code section 203 claim.  The Court of Appeal found that the meal period premiums are not a wage, but a legal remedy, imposed to provide relief to the employee and deter employer misconduct.  Likewise, because a meal premium payment was considered a penalty and not a wage, the Court of Appeal opined that employees could not recover against an employer for failure to include the meal premium payments in the required “wages earned” calculation on employee wage statements.  

Unfortunately, the California Supreme Court found the lower court’s reasoning to be in error.  The Court concluded that meal premium payments, as defined by Labor Code section 226.7, have a dual purpose as both a legal remedy and to compensate employees for the hardship imposed by requiring the employee to work when they ought to have received a meal period. Under this interpretation, the extra pay constitutes a wage and must be reported appropriately and paid promptly in compliance with sections 203 and 226.7 of the Labor Code. 

Application

Despite this unfavorable interpretation, it is important to note that this decision does not necessarily mean meal and rest period violations automatically create derivative liability for wage statement and waiting time penalties.  Employees must still provide sufficient evidence that the other required conditions for imposing penalties under Labor Code Sections 203 and 226 are met. This includes a showing that the employer’s conduct in failing to report premiums on the wage statement was “knowing and intentional,” and that the failure to pay all premiums owed upon an employee’s termination was “willful.”  In many cases, a purely derivative wage statement and waiting time penalty claim will lack these critical components.  For example, where an employee ends their break and returns to work without notifying their superiors, the failure to include a meal premium payment on the wage statement or to include the premium payment on final wages cannot be said to be knowing, intentional, or willful. 

While this good faith defense does provide some relief and protection to employers in certain circumstances, there are still troubling elements and inconsistencies within the Court’s analysis that may manifest themselves in other contexts in the future.  Particularly, the Court states in its analysis of Labor Code Section 226.7 (c) (this is the section that provides for the provision of meal premium payments in the first place) that an employer’s failure to report an “additional credited hour of work” as well as the corresponding premium payment on the wage statement deprives the employee of adequate and reliable information, which results in injury to that employee.  But this is nonsense because it is simply illogical to equate a meal period premium payment with an additional hour of work that never actually occurred and to penalize employers based off this blatantly false characterization.  This illogical conflation of a premium payment with an additional hour of work is reasonably likely to provide fertile ground for intrepid plaintiff’s counsel to assert a whole new battery of spurious claims in other contexts.

Implications For Ongoing Compliance

Now more than ever, it is critical for employers to abide by California’s meal and rest break rules to avoid the incrementally increasing costs of noncompliance, which now include potential wage statement and waiting time penalties. This includes maintaining strict meal and rest period policies and promptly paying out meal and rest period premiums in compliance with California law.  

Employers should also take a thoughtful approach to properly identifying and calculating all meal and rest break premiums on the statutorily required wage statements.  Employers will need to inform and educate their managers and payroll departments of the potential need to reformat pay statements to ensure that they adequately reflect the requirements of this most recent Naranjo decision.  This, however, is no easy task, as a misguided attempt to comply with Naranjo may inadvertently lead to violations of other complex aspects of California wage and hour jurisprudence.  Accordingly, an employer’s best option is to consult with competent California wage and hour counsel to determine the best course of action for their specific situation.

Finally, this decision further cements the concerns of California employers that the California Supreme Court has swung so far to the left and pro-employee side that California employers share little chance of success in cases pending before the Court.