California: Good-Faith Belief an Employer Was Compliant Spares It from Penalties

An employer that reasonably and in good faith believed it was providing a complete and accurate wage statement in compliance with California law has not intentionally failed to comply with the wage statement law and doesn’t have to pay civil penalties, the state Supreme Court ruled May 6. We’ve gathered articles on the news from SHRM Online and other outlets.

Court’s Ruling

The state court of appeal had held that the trial court erred in finding that the company’s failure to report meal premium pay on employees’ wage statements was knowing and intentional. The state Supreme Court agreed. The question before the state Supreme Court focused on the circumstances under which a plaintiff is entitled to civil penalties in addition to other forms of relief, based on knowing and intentional failure by an employer to comply with California law.

The defendant argued that the plain meaning of the phrase “knowing and intentional failure to comply” requires a showing that the employer knew that it was required to include certain information in wage statements—here, unpaid premium pay for missed meal breaks—and nevertheless intentionally omitted that information from the wage statements that it provided. The defendant argued that it is not liable for penalties under that provision because it had a reasonable, good faith basis for believing 1) that it did not owe its guards premium pay for missed breaks and 2) that it was not, in any event, obligated to report missed-break premium pay on wage statements. Both of these questions were ultimately decided against the defendant after years of litigation, but the defendant contended penalties were not warranted because it had a reasonable basis at the time for believing the law was otherwise.

“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 fees,” the state Supreme Court stated. “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.”

Punitive damages aren’t intended to compensate but to deter and punish, the court noted. “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,” the court stated.

The plaintiff raised concerns that excusing employers from penalties based on good-faith mistakes of law would excuse and incentivize ignorance of the law. The state Supreme Court said these concerns were unfounded. The state Supreme Court noted the trial court concluded that initially there was some uncertainty, given the defendant’s role as a federal security contractor, whether California wage laws and wage orders applied to the defendant’s officers. Whether premium pay for missed meal breaks should be reported on wage statements as “wages earned” and missed breaks credited as “hours worked” was also an unsettled legal issue when the case was tried, the state Supreme Court added.

The court of appeal in this case was the first to consider whether missed-break meal premiums must be reported on wage statements. The state Supreme Court has since said that “failure to report premium pay for missed breaks can support monetary liability” for failure to supply an accurate itemized statement reflecting an employee’s gross wages earned, net wages earned and credited hours worked—even if meal premiums were not paid. Previously, “the question whether wage statements must include premium pay for missed meal breaks, even if unpaid, was complex and debatable.”

Given these legalities that were uncertain at the time, the defendant’s failure to include unpaid meal premiums in its employees’ wage statements from June 2004 to September 2007 was not knowing and intentional within the meaning of California law, the state Supreme Court ruled.

(State Supreme Court decision)

Plaintiffs Sought Penalties

The plaintiff class won a $4.2 million verdict due to the court’s 2022 decision but sought an additional $400,000 in civil penalties. The court resolved a question that has divided federal and state appellate courts.

(Daily Journal)

Deterrence Effect Questioned

Associate Justice Leondra R. Kruger wrote in the California Supreme Court opinion that civil penalties won’t deter repeat mistakes among businesses that believe their wage statements follow the law.

(Bloomberg)

Wage Statement Requirements

The California Division of Labor Standards Enforcement (DLSE) provides an example of an itemized wage statement. Note that sick leave hours available must be provided in addition to other information on the pay stub, including:

• Name and address of the legal entity.
• Name of the employee and only the last four digits of the employee's Social Security number. 
• All applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee.
• Inclusive dates of the period for which the employee is paid.
• Gross wages earned.
• Total hours worked for nonexempt employees who do not receive compensation in the form of salary.
• Number of piece-rate units earned and piece rate, if applicable.
• Any and all deductions.
• Net wages earned.
• Businesses that are temporary services employers must include the rate of pay and total hours worked for each temporary services assignment an employee works.

(California DLSE and SHRM Toolkit)