California Supreme Court Raises the Stakes (Again) on Meal and Rest Break Law by Adding Derivative Penalties

Highlights of Naranjo v. Spectrum Security Services, Inc.

• Premium pay - the additional hour of pay non-exempt employees are entitled to if their employer fails to provide them with timely, full, and uninterrupted meal and rest periods - constitutes wages for purposes of pay stubs and timing of payment at separation from employment.
• Wage statements furnished to California employees must reflect premium pay.
• California employees may recover waiting time penalties for unpaid premium payments upon discharge or resignation.
• The decision is likely retroactive.
• California employers whose workforce includes nonexempt employees should audit their break and final pay policies and practices as well as their wage statements to ensure that they reflect premium payments.

Last year, the California Supreme Court held that premium pay for non-compliant meal and rest breaks must be paid at the “regular rate of pay” rather than the employee’s base hourly rate of pay. On 23 May 2022, the California Supreme Court raised the stakes again by holding that premium pay for missed breaks constitutes “wages” rather than penalties, such that they must be reported on wage statements during employment and paid within the statutory deadlines when an employee leaves the job.

Background

Plaintiff Gustavo Naranjo (Naranjo) was a security guard employed by Spectrum Security Services, Inc. (Spectrum), which transports and guards prisoners and detainees with appointments outside federal custodial facilities. Naranjo was a non-exempt employee who Spectrum terminated because he left his post to take a meal break in violation of Spectrum’s policy requiring him to remain on-duty due to the nature of the work. Naranjo brought a class action on behalf of Spectrum’s nonexempt employees, alleging that Spectrum failed to report premiums owed to employees on their wage statements and timely pay premiums to non-exempt employees upon discharge or resignation.

The Court of Appeal held, inter alia, that Spectrum’s failure to make premium payments did not give rise to liability for inaccurate wage statements and waiting-time penalties. The rationale was that premium pay did not constitute a “wage” because the premium payment is a penalty for the employer’s recalcitrance, not for work performed. The Court of Appeal relied in part on Murphy v. Kenneth Cole Productions, Inc.¹ and Kirby v. Immoos Fire Protection, Inc.² in reaching its conclusion.

The California Supreme Court granted review.

The California Supreme Court’s Decision

The California Supreme Court explained that Murphy and Kirby, supra, which have long supplied the rationale that the Court of Appeal and federal district courts relied on for the proposition that premium payments are not wages, have been misread and mischaracterized. The “conclusion that premium pay cannot constitute wages rests on a false dichotomy: that payment must be either a legal remedy or wages.” The California Supreme Court further explained:

An employee who remains on duty during lunch is providing the employer services; so too the employee who works without relief past the point when permission to stop to eat or rest was legally required. Section 226.7 reflects a determination that work in such circumstances is worth more — or should cost the employer more — than other work, and so requires payment of a premium.

...

That missed-break premium pay serves as a remedy for a legal violation does not change the fact that the premium pay also compensates for labor performed under conditions of hardship. One need not exclude the other.

Spectrum argued that premium pay is not a wage because it is payable as a lump sum for a missed break of any duration (as opposed to a sum correlated with time worked). In rejecting that argument, the California Supreme Court reasoned that there are other types of compensation that “lack a perfect one-to-one correlation with the amount of time worked,” such as reporting-time pay³ or split-shift pay⁴, both of which are considered “wages.”

For those reasons, the Court held that “[missed]-break premium pay is indeed wages subject to the Labor Code’s timely payment and reporting requirements, and it can support section 203 waiting time penalties and section 226 wage statement penalties . . . .”

Naranjo Likely Applies Retroactively

Judicial decisions are generally applied retroactively, unless such a decision represents a change in settled law. Rather than explore this exception to retroactive application, the Naranjo Court made clear that as early as April 2007, in Murphy, it “unambiguous[ly] pronounce[d] that section 226.7 premium pay is . . . a wage designed to compensate employees for work . . . .” Therefore, California employers should anticipate that plaintiff’s attorneys may amend their existing complaints (and file new ones) asserting claims for derivative waiting-time penalties and wage statement violations where there are claims for failure to pay premium payments.

What Does This Mean for Employers?

Derivative Claims

Gone is any glimmer of hope California employers may have had after the Court of Appeal’s ruling in September 2019. The California Supreme Court’s opinion - in no uncertain terms - reversed the Court of Appeal’s key holding. Now, the failure to timely pay premium payments and report them on wage statements can cause liability under California’s waiting-time and wage statement statutes. When evaluating exposure for alleged meal and rest period violations, California employers should consider derivative waiting-time and wage statement claims.

Open Door for Defenses

Both the Court of Appeal and the California Supreme Court did not take up the issues of whether Spectrum acted (1) willfully by failing to pay premium payments upon discharge or resignation (Cal. Lab. Code § 203) or (2) knowingly and intentionally by failing to report premium payments on wage statements (Cal. Lab. Code § 226). The case law defining “willful[ ]” and “knowing[ ] and intentional[ ]” is sparse, but California employers may still rely on those defenses in limited circumstances.

Audit Policies, Practices, and Wage Statements

It is more important than ever for California employers to audit their break policies and practices as well as their wage statements. California employers should also train their supervisors, managers, payroll department, and Human Resources personnel to ensure compliance to mitigate against the risk of and exposure from meal and rest break claims and derivative waiting-time and wage statement claims.