In a unanimous decision this week, the California Supreme Court raised the stakes for California employers faced with ever-ubiquitous meal and rest period claims by holding that a failure to pay employees premium payments for non-compliant meal and rest periods may give rise to derivative violations for:
(1) failure to provide accurate itemized wage statements under Labor Code section 226; and
(2) failure to timely pay all wages owed at separation of employment under Labor Code section 203.
Gustavo Naranjo, et al. v. Spectrum Security Services, Inc. (Cal., May 23, 2022, No. S258966) 2022 WL 1613499, at *1.
Background
Plaintiff Gustavo Naranjo filed a class action lawsuit on behalf of all similarly situated employees of Spectrum Security Services, Inc., alleging that Spectrum violated state meal period requirements under the Labor Code and the applicable Industrial Welfare Commission wage order. The trial court agreed with Naranjo that Spectrum had no valid on-duty meal period agreement for part of the class period and directed a verdict for the plaintiff class on the meal period claim for that portion of time. It also concluded that 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 so Spectrum was not liable for section 203 waiting time penalties. The trial court entered judgment for the plaintiff class on the meal period and wage statement claims and awarded attorney fees and prejudgment interest at a rate of 10 percent.
The Court of Appeal affirmed the trial court’s determination that Spectrum violated the meal period laws during the time it lacked on-duty meal period agreements, but reversed the court’s holding that a failure to pay meal period premiums could support claims under the wage statement and timely payment of final wages statutes. The Court of Appeal also ordered the rate of prejudgment interest reduced from 10 to 7 percent.
California Supreme Court’s Decision
In reversing the Court of Appeal, the Supreme Court rejected the lower court’s reasoning that a premium payment under section 226.7 is not to be considered “wages” because the payment of a premium is a legal remedy, not payment for labor. In doing so, the Supreme Court noted that although the Court of Appeal was correct that premium pay is a statutory remedy for a legal violation, its conclusion that premium pay cannot constitute wages rests on the false dichotomy that a payment must be either a legal remedy or wages. For these purposes, the Supreme Court noted, section 226.7 is “both.”
In its decision, the Court mentioned overtime wages or split-shift pay as being analogous, and reasoned that the manner in which the pay accrues does not in itself determine whether it is designed to compensate for labor. While premium pay is owed to employees for hardships the Legislature concluded employees should not be made to suffer, when those hardships include rendering work, the premiums owed can equally be viewed as wages.
In the end, the Court unambiguously made clear the following:
- Premium pay for non-compliant meal and rest periods now constitutes wages for purposes of Labor Code section 203, so waiting time penalties may be available under that statute if the premium pay is not timely paid; and
- An employer’s obligation under Labor Code section 226 to report wages earned now also includes an obligation to report premium pay for missed periods, any failure to report premium pay for missed periods may support monetary liability under section 226 for failure to supply an accurate itemized wage statement.
The Court reserved the decision as to whether wage statement monetary liability and waiting time penalties were available in the case because the Court of Appeal did not address the issues raised by the defendant, including that failing to include the premiums on wage statements was not “knowing and intentional” and whether the failure to pay the premium payments at the end of employment was “willful.” The Court is sending the case back to the Court of Appeal to make those determinations.
Finally, in what could hardly be considered a gift to employers in light of the above, the Court agreed with the Court of Appeal that the 7 percent default prejudgment interest rate set by the state Constitution applies to amounts due for failure to provide meal and rest periods.
Employer Takeaways
Intuitively, the Court’s reasoning that all meal period premiums constitute unpaid wages for work performed can be hard to grasp, for example, when a meal period is technically late but not missed or short (i.e., it would seem to be only a premium, as no wages went unpaid for any time actually worked). There are also many other examples of the interplay between calling for a payment as a premium, versus attempting to compensate for unpaid time worked via wages. The Court has nevertheless made clear, for now, that premiums in either scenario are to be considered wages.
The consequence of this determination is that it dramatically increases the potential liability exposure for all employers, particularly in class actions. Employers who, even inadvertently, fail to pay meal or rest period premiums when they are owed may now be liable for (1) up to $4,000 per employee for failing to provide accurate, itemized wage statements, as well as (2) waiting time penalties for former employees who were not paid out any premiums they were owed at the time of their separation. And, such premiums must be recorded on wage statements, or that failure alone will also give rise to potential damages and penalties. The preceding was not the case previously. Lastly, irrespective of the actual (even minimal) amount that was unpaid at the time of an employee’s separation, waiting time penalties are equivalent to 30 days’ wages for each employee, so the resultant liability is exponential based on the number affected and can be very expensive.
In light of this decision, California employers should take heed and immediately revisit and review any existing meal and rest period policies to ensure proper compliance under the law. Employers should also ensure that meal and rest period premiums are timely paid. Given the above, these payments should also be recorded on employee wage statements. Employers should also strongly consider implementing a meal and rest period verification system to confirm compliant meal and rest periods were always provided even if the time records do not show meal periods were taken. Employers should also consider conducting periodic internal reviews or audits of employee meal and rest periods and payment of resulting premiums to ensure compliance and mitigate potential liability moving forward.
Please feel free to contact the authors or your regular counsel with any questions you might have regarding this EAC Update.
