Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partners Jerry Maatman and Shireen Wetmore and special counsel Eden Anderson with their discussion of landmark ruling issued last week by the California Supreme Court and its developing impact on wage & hour class and collective action litigation in the Golden State.
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Episode Transcript
Jerry Maatman: Thank you loyal blog readers, welcome to our weekly podcast, the Class Action Weekly Wire. I’m Jerry Maatman, a partner at Duane Morris, and joining me today from sunny California are my colleagues, Shireen Wetmore and Eden Anderson. Thanks so much for being on today’s podcast.
Eden Anderson: Thanks Jerry. I’m very happy to be here.
Shireen Wetmore: Jerry, thanks for having me.
Jerry: Today, we’re focusing on a recent California Supreme Court ruling in a case called Naranjo v. Spectrum Security Services. It is a gift to employers, because typically news from the California Supreme Court is not always a thumbs up for employers. But in this case we’re going to discuss and explore what it means for employers, and why this decision is so important for employers facing California Labor Code claims. Eden, you briefed this case and you won it before the California Supreme Court – could you give us a little background on what was before the Court in this case?
Eden: Of course Jerry. The procedural history here is a bit convoluted, and involves a couple trips to the California Supreme Court. Mr. Naranjo worked as a security officer for Spectrum. But he was not guarding property. Spectrum contracts with federal agencies, including the U.S. Marshals Service, FBI, Federal Bureau of Prisons, ICE, and DEA, to provide guarded transport for federal prisoners and detainees. The federal contracts required continuous custody of the prisoner. So, because of the nature of the work, Spectrum just paid its officers continuously through their shifts and did not provide an unpaid 30-minute meal period.
And so way back in 2004, Mr. Naranjo filed a class action alleging claims under California law for meal period violations, and he also asserted derivative claims for statutory penalties for failure to pay all wages due at termination, which is a claim asserted under Section 203 of the Labor Code; and a claim for statutory penalties for wage statement inaccuracies or violations, which is a claim asserted under Section 226(e) of the Labor Code. These claims were all certified as a class and proceeded to trial.
At trial, Spectrum asserted a number of defenses premised on the fact that its officers worked alongside federal employees on federal lands, arguing that California meal period requirements just didn’t apply, and ultimately, those defenses were rejected by the trial court.
But, the judge found that the defenses had been asserted in good faith and were objectively reasonable, and the judge held that Spectrum’s good faith served as a defense to the Section 203 waiting time penalties claim, but not the Section 226(e) wage statement claim, and the difference in outcome was tied to different statutory language in those sections. As a result, Spectrum was found liable not just for the underlying meal period infractions, but for an additional $1.1 million in statutory penalties and attorneys’ fees.
Jerry: That’s a very interesting outcome in the practical, real world in which companies and employers are endeavoring to comply with requirements of the California Labor Code. What’s the distinction between the waiting time penalties and the wage statement violations?
Eden: Section 203 of the Labor Code imposes liability for a “willful” failure to pay all wages due at termination, and Section 226(e) imposes liability for a “knowing and intentional failure” to provide an accurate wage statement. So, the trial court felt that “willful” and “knowing and intentional” meant different things.
Jerry: Well, the $1.1 million dollar statutory penalty was a whopper. I take it the decision was appealed – what happened at the California Court of Appeal?
Eden: Well, the Court of Appeal did not actually address the statutory language issue. Instead, it held that meal period premiums were not “wages,” and because they weren’t wages, Labor Code Sections 203 and 226 didn’t apply at all.
But the California Supreme Court then granted review and disagreed. It held in 2022 that meal period premiums and also rest period premiums are wages that must be fully paid at termination, and which also have to appear on a wage statement. So then, the California Supreme Court remanded the case to the Court of Appeal to revisit the Labor Code Sections 203 and 226 claims.
On remand, the Court of Appeal found that Spectrum’s defenses had been asserted in good faith and that a good faith dispute as to liability furnished a defense both to claims. The Court of Appeal also held that Spectrum could not have known that a meal period premium had to appear on a wage statement because the law as to whether a meal period premium was a wage or penalty was not clear until the 2022 decision.
Naranjo then sought review, and the California Supreme Court again took up the case, this time to determine whether a good faith defense applies to wage statement claims under Labor Code Section 226(e).
And that brings us to last week’s ruling that we are discussing today.
Jerry: Well, thanks so much, Eden, that’s a great overview, and in essence a scorecard for employers closely watching this case in terms of how it got up to the California Supreme Court and how the ruling emanated. Shireen, how did the California Supreme Court answer that essential question, and what does the decision mean for employers who are facing these sorts of claims?
Shireen: Thanks, Jerry. Great question. So this ruling has huge ramifications for pending wage statement claims, and we see them routinely asserted in wage and hour class actions, but they also serve as a basis for claims and civil penalties in PAGA actions. And it’s an exceptionally rare pro employer decision, which is why we’re all so jazzed about it. But the court held that an employer’s objectively reasonable good faith belief that it complied with the law serves as a defense to liability for penalties in an inaccurate wage statement under Labor Code 226(e).
So what does that mean? It means that if an employer has objectively reasonable defense to liability as to the underlying claim for unpaid wages, it will not also be liable for additional wage statement penalties, even if the defense is ultimately rejected. Which is what happened here. So if an employer is found to be liable for the underlying claim, still going to get out of those penalties – that is a huge benefit for employers. So, an employer tried to comply with the law. Their conduct and defenses were objectively reasonable. They shouldn’t be facing liability on the wage statement penalties – or if the law as to whether wages were even due was in some way unclear at the time, that too serves as a potential defense to a wage statement penalty claim. Just a reminder, our audience definitely already knows this, but a good faith defense does not include ignorance of the law. But it’s still a really significant win for California employers, because, as you were saying earlier, employers work really hard to try to comply with the very complex world that is California Labor Code wage & hour requirements. And these wage statement claims they can, as was the case here, add hundreds of thousands of dollars in exposure in a class action. It’s often the tail wagging the dog on an otherwise limited claim for damages in these cases. And so the Naranjo decision means that employers who act in good faith have a really important defense, and should not be facing liability for wage statement penalties going forward.
Jerry: Seems to me this is a huge win. I’ve always thought employers don’t wake up every morning and think about how am I going to steal wages from my employees. Rather they’re thinking about, how am I going to comply with the law? And this gives them a huge incentive and a huge defense in class actions involving California labor code violations.
Conversely, how will this impact PAGA claims were those sorts of penalties are being sought by plaintiffs’ counsel?
Shireen: Well, that’s a great question, and it kind of remains to be seen. The impact of the decision is something we anticipate parties are going to be arguing about, continuing to argue about, maybe expediting some of the arguments they are making. From our perspective, it would make no sense to award civil penalties under PAGA if the employer is not liable for statutory penalties under the wage statement statute that forms the basis for the PAGA claim. But plaintiffs are likely going to try to limit the decision. They’re going to argue that the good faith defense only applies to Section 226(e) and not to their PAGA claim. So this is something we’re going to be closely watching and duking out – possibly with Eden briefing up to the California Supreme Court again.
Jerry: Well, congratulations to the defense team here, kudos to you in terms of pushing the edges of the law and coming up with defenses that work for our clients and for employers in general in California. And thanks so much to both of you for joining this week’s podcast.
Shireen: Jerry, thanks for having us.
Eden: Thank you, everyone. Glad to be part of the podcast and this big win for California employers.