Good-Faith Compliance May Prevent Penalties

On February 27, the California Court of Appeal, 2nd District, announced a ruling involving wage penalties and “good faith compliance.”  Markedly, the decision was in response to a May 2022 California Supreme Court ruling on meal and rest break premiums. Generally, that ruling stated that premium payments owed under Labor Code section 226.7 for meal and rest breaks constitute “wages.” The Court of Appeal decision examined the consequences for willfully withholding those wages upon an employee’s termination of employment. Previously, the California Supreme Court heard discussions on the implications of the Americans with Disabilities Act (ADA) and website accessibility.

Background of Original Case

In summary, according to the National Law Review, Naranjo et al. v. Spectrum Sec. Servs., Inc. defined “wage payments.” Specifically, any payments defined as meal or rest break payments under California law are considered wages. As a result, the ruling addressed employers who willfully withhold final wages from departing employees. These final wages could include unpaid meal or rest break payments. Consequently, employers would owe a waiting time penalty of up to 30 days of daily wages. However, the argument of “willfulness” is a sticking point in many court rulings. Employers have argued that they felt they were in “good faith compliance” with the laws they needed to follow. Chiefly, they believed they were accurately paying departing employees based on the information that they had. During the original trial, Spectrum presented evidence of its belief that the California Labor Code did not apply. This was due to the employees working in federal enclaves and performing federal functions. Despite that defense, the California Supreme Court ruled that Spectrum must pay former employees their total wages. However, the high court did not believe that the company willfully withheld any wage payments. After that, the California Supreme Court remanded the case to the Court of Appeal.

Court of Appeal Ruling and Good Faith Compliance

Once the California Supreme Court sent the case to the Court of Appeal, the lower court needed to determine the following:

• whether the trial court had erred in finding the employer had not acted “willfully” in failing to timely pay employees' premium wages (which barred recovery for penalties under section California Labor Code section 203); and
• if Spectrum’s failure to report missed break premium pay on wage statements was “knowing and intentional” under section 226.

The February ruling affirmed the earlier finding of Spectrum’s “good faith compliance” basis for its failure to pay meal premiums for departing employees. Therefore, any failure to pay wage premiums was not willful. To avoid costly legal disputes and ensure compliance with wage laws, employers should implement a wrongful termination prevention program. This program should include proper documentation, clear policies on wage and hour regulations, and training to ensure that all employee terminations are conducted in a fair, lawful manner, reducing the risk of penalties and lawsuits.