On May 6, 2024, the California Supreme Court issued its decision in Naranjo v. Spectrum Security Services, Inc. A rare victory for California employers, the Court unanimously held that if an employer reasonably and in good faith believes it is providing complete and accurate wage statements in compliance with Labor Code section 226, then it has not "knowingly and intentionally" failed to comply with the wage statement law. Thus, no penalty for inaccurate or incomplete wage statements under section 226 should apply.

This is Naranjo's second time before the California Supreme Court. In May 2022, the Court considered the issue of whether meal and rest period premiums are "wages" or penalties, and if they are wages, whether an employer's failure to pay such premiums gives rise to claims for waiting time penalties or wage statement violations. Answering in part, the Court concluded only that meal and rest premiums are to be treated as wages. The case was then remanded to the California Court of Appeal to decide the two remaining and derivative issues:

1. Whether the trial court erred in finding that Spectrum's failure to timely pay meal period premiums was not "willful," thus barring any recovery for penalties under Labor Code section 203.
2. Whether the trial court erred in finding that Spectrum's failure to report meal period premiums on its employees' wage statements was "knowing and intentional," permitting recovery for penalties under Labor Code section 226.

On remand, the Court of Appeal agreed that Spectrum's failure to pay meal period premiums was not "willful" because Spectrum provided substantive evidence to support the conclusion that it had a good faith basis for believing that it acted lawfully. Therefore, Spectrum's employees were not entitled to waiting time penalties under section 203. As to the issue of whether Spectrum owed penalties for its failure to report premiums on employees' wage statements, the Court of Appeal concluded that Spectrum was not liable for those penalties. The Court of Appeal reasoned that the section 203 "willful" requirement is substantially identical to the section 226 "knowing and intentional" requirement. Spectrum's failure to report meal premiums was not knowing and intentional just as its failure to pay premiums was not willful. Notably, the Court of Appeal acknowledged that the issue of how to apply the section 226 "knowing and intentional" requirement has the state appellate and federal district courts divided.

Naranjo then returned to the California Supreme Court to decide whether an employer has "knowingly and intentionally" failed to comply with section 226 when it believes in good faith it was acting in compliance. The Court noted how civil penalties are frequently imposed on bad faith actors to deter and punish. Therefore, the Court said, it is reasonable to assume the Legislature intended section 226 to target employers who knowingly and intentionally flout the wage statement law but not those who make good faith mistakes about what the law requires. The Court also looked at section 203 for guidance, because claims for waiting time penalties are often alleged with claims for failure to provide complete and accurate wage statements. Under long-established law, an employer cannot incur civil or criminal penalties for nonpayment of wages when the employer disputes in good faith that wages are due. According to the Court, it would not make sense to withhold penalties when an employer disputes in good faith that wages are owed, but impose penalties for failing to report those very same wages on a wage statement.

Though the California Supreme Court's decision is not a license for employers to ignore their legal obligations regarding wage statement compliance, it is a positive outcome for employers who are grappling with California's stringent and complex wage and hour laws. It means that employers cannot be liable for section 226 penalties if the employer demonstrates a reasonable and good faith belief that it provided its employees with compliant wage statements. Thus, the decision should provide some breathing room to employers, who can now be assured that they won't trigger a host of cascading penalties for one simple mistake, as long as they continue to act in good faith. To get ahead of potential liability, employers should periodically consult their legal counsel in order to ensure their compliance with California's wage statement requirements.