Is Compliance with Statute Excused by Good Faith, but Erroneous, Belief?

In the recent unanimous California Supreme Court decision in the case of Naranjo v. Spectrum Security Services, Inc., considered the California statute that requires employers to provide their employees with written wage statements listing gross and net wages earned, hourly pay rates, hours worked, and other employment-related information. (Lab. Code, § 226.)

If a claimant demonstrates that an employer has failed to comply with this requirement, the claimant is entitled to an injunction compelling compliance and an award of costs and reasonable attorney’s fees.

But in the case of a “knowing and intentional failure . . . to comply,” the law provides for statutory penalties of up to $4,000 or the employee’s actual damages, should the employee’s damages exceed the statutory penalties.

The question presented was whether an employer has knowingly and intentionally failed to comply with section 226’s requirements when the employer had a good faith, yet erroneous, belief that it was in compliance.

The law requires employers to treat certain amounts— premium pay awarded for the deprivation of a lawful meal or rest break — as wages earned for purposes of provisions penalizing the willful failure to timely pay wages to former employees (Lab. Code, § 203), and the knowing and intentional failure to report wages earned in compliance with Labor Code section 226.

Defendant Spectrum Security Services, Inc. (Spectrum) provides secure custodial services to federal agencies. Spectrum transports and guards prisoners and detainees who require outside medical attention or have other appointments outside custodial facilities.

Plaintiff Gustavo Naranjo worked as a guard for Spectrum. 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, among other things, that Spectrum had violated state regulations governing meal breaks.

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

The complaint further alleged that Spectrum had violated Labor Code section 226 by failing to report the premium pay it owed as wages on employees’ wage statements.

In 1984, the California Legislature added Labor Code section 226.6, that makes the knowing and intentional violation of section 226 a misdemeanor offense.

The statute does not define what constitutes a “knowing and intentional” violation.

But in 2012, the Legislature added a provision specifying what a “knowing and intentional” violation is not: “For purposes of this subdivision, a ‘knowing and intentional failure’ does not include an isolated and unintentional payroll error due to a clerical or inadvertent mistake. In reviewing for compliance with this section, the factfinder may consider as a relevant factor whether the employer, prior to an alleged violation, has adopted and is in compliance with a set of policies, procedures, and practices that fully comply with this section.

The question presented in this appeal concerns only the circumstances under which a plaintiff is entitled to statutory penalties in addition to these other forms of relief, based on a knowing and intentional failure by an employer to comply with section 226. 

On its face, the statute might appear to answer the question: It is the “failure to comply” with the law that must be knowing and intentional — not simply the act of issuing a wage statement that omits certain information that the law, properly interpreted, requires to be included.

The wording of the penalty provision, which connects the employer’s culpable state of mind to a violation of the law, is reasonably read to excuse intentional acts or omissions that are based on a reasonable, good faith mistake about what compliance with the law requires.

The context caused the Supreme Court to conclude that section 226, subdivision (e)(1) is best read to allow for a defense based on good faith belief in compliance.

The operative “knowing and intentional” language does not appear in a liability provision, but in a penalty provision. In other words, the purpose of asking whether the employer has knowingly and intentionally failed to comply with the requirements of section 226 is not to determine whether or not the employer has, in fact, violated the statute.

There is no doubt that an employer who issues incomplete wage statements is not complying with the statute, and an employee who can so demonstrate in court is entitled to remedies consisting of injunctive relief, costs, and reasonable attorney’s fees.

The question is only whether the employee is also entitled to an additional monetary remedy in the nature of penalties for knowing and intentional noncompliance.

As a general rule, courts refuse to impose civil penalties against a party who acted with a good faith and reasonable belief in the legality of his or her actions.

That is because the purpose of imposing civil penalties is typically, as with punitive damages, not primarily to compensate, but to deter and punish.

Those who proceed on a reasonable, good faith belief that they have conformed their conduct to the law’s requirements do not need to be deterred from repeating their mistake, nor do they reflect the sort of disregard of the requirements of the law and respect for others’ rights that penalty provisions are frequently designed to punish.

LESSONS:

1.         If possible, act with a good faith and reasonable belief in the legality of the actions.

2.         The law requires employers to treat certain amounts— premium pay awarded for the deprivation of a lawful meal or rest break — as wages earned for purposes of provisions penalizing the willful failure to timely pay wages to former employees (Lab. Code, § 203), and the knowing and intentional failure to report wages earned in compliance with Labor Code section 226.

3.         Those who proceed on a reasonable, good faith belief that they have conformed their conduct to the law’s requirements do not need to be deterred from repeating their mistake, nor do they reflect the sort of disregard of the requirements of the law and respect for others’ rights that penalty provisions are frequently designed to punish.