California Appellate Panel Defines ‘Willful’ Wage Nonpayment and ‘Good Faith Dispute’

Employment Law

A California appellate panel has weighed in on premium pay in a decision on remand from the state’s highest court, with an employer-friendly result.

Spectrum Security Services provides custodial services to federal agencies, transporting and guarding prisoners and detainees who require outside medical attention or have other appointments.

A guard for Spectrum, Gustavo Naranjo, was suspended and later fired after leaving his post to take a meal break in violation of a Spectrum policy that required custodial employees to remain on duty during all meal breaks.

Naranjo filed a putative class action on behalf of Spectrum employees, alleging that the employer had violated state meal break requirements under the Labor Code and the applicable wage order.

The complaint sought an additional hour of pay—known as “premium pay”—for each day on which Spectrum failed to provide employees with a legally compliant meal break.

Naranjo also alleged two Labor Code violations related to Spectrum’s premium pay obligations: failure to report the premium pay on employees’ wage statements and failure to timely provide the pay to employees upon their discharge or resignation.

The trial court initially granted summary judgment in favor of Spectrum, but an appellate panel reversed. On remand, the trial court certified a class for the meal break and related timely payment and wage statement claims and then held a trial in stages.

Following this trial, the court directed a verdict for the class on the meal break claim and concluded that the obligation to supply meal break premium pay also carried with it reporting and timing obligations.

The trial court found Spectrum’s wage statement omissions were intentional and awarded Labor Code Section 226 penalties, but the failure to make timely payment was not willful, and Spectrum was found not liable on Section 203 penalties.

Both sides appealed. The Court of Appeal reversed the trial court’s holding that a failure to pay meal break premiums could support claims under the wage statement and timely payment statutes.

The California Supreme Court Disagreed with regard to the premium payments, holding the extra pay for missed breaks constitutes “wages.”

On remand, the appellate panel considered whether the trial court erred in finding Spectrum had not acted willfully with regard to its Section 203 penalties and whether Spectrum’s Section 226 failure was “knowing and intentional,” requiring premium pay.

“[W]e conclude as follows: (1) substantial evidence supports the trial court’s finding that Spectrum presented defenses at trial—in good faith—for its failure to pay meal premiums to departing employees and therefore, Spectrum’s failure to pay meal premiums was not ‘willful’ under section 203; and (2) because an employer’s good faith belief that it is in compliance with section 226 precludes a finding of a knowing and intentional violation of that statute, the trial court erred by awarding penalties, and the associated attorneys’ fees, under section 226,” the panel wrote.

The regulations for Section 203 provide that “[a] willful failure to pay wages within the meaning of Labor Code Section 203 occurs when an employer intentionally fails to pay wages to an employee when those wages are due. However, a good faith dispute that any wages are due will preclude imposition of waiting time penalties under Section 203.”

A “good faith dispute” occurs when an employer presents a defense, based in law or fact, that, if successful, would preclude any recovery on the part of the employee. The fact that a defense is ultimately unsuccessful will not preclude a finding that a good faith dispute did exist. Defenses presented that, under all circumstances, are unsupported by any evidence, are unreasonable or are presented in bad faith will preclude a finding of a “good faith dispute,” according to the regulations.

Applying this standard, the appellate panel found Naranjo forfeited his substantial evidence claim and failed to point to any evidence in the record that may have opposed the trial court’s finding that Spectrum’s defenses were presented in good faith.

The trial court, therefore, properly denied waiting time penalties under Section 203 based on its finding that Spectrum did not willfully fail to pay timely wages.

As for the Section 226 premium payment, the statute provides that an “employee suffering injury as a result of a knowing and intentional failure by an employer to comply” is entitled to recover the greater of actual damages or statutory penalties.

Naranjo argued that Spectrum’s failure to include premium pay on wage statements was knowing and intentional because Spectrum was aware of what it included and excluded on wage statements. The employer countered that its failure was not knowing and intentional because it had a good faith belief it was not in violation of Section 226.

The court sided with Spectrum, agreeing with the majority of courts that have considered the issue and concluding that an employer’s good faith belief that it is not violating Section 226 precludes a finding of a knowing and intentional violation.

To read the opinion in Naranjo v. Spectrum Security Services, Inc., click here.

Why it matters: While the appellate panel’s findings were case-specific, its analysis of the standards for violating Sections 203 and 226, entitling employees to premium pay, provides employers with an opportunity to avoid liability. Under Section 203, for example, an employer can establish a “good faith dispute” with a reasonable defense, while the court also established that an employer’s good faith belief that it is not violating Section 226 precludes a finding of a knowing and intentional violation



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