On September 26, 2019, California’s Second District Court of Appeals in Gustavo Naranjo, et al. v. Spectrum Security Services, Inc. held that unpaid premium wages for meal break violations do not entitle employees to additional remedies under the California Labor Code for inaccurate wage statements or waiting time penalties.

By limiting employees’ ability to bring derivative inaccurate wage statement and unpaid wage claims, the decision immediately decreases employers’ overall exposure for Labor Code penalties, class counsel’s attorneys’ fees, and civil penalties under the Private Attorneys General Act (PAGA).

The Naranjo decision impacts the interplay of several statutes present in many wage-hour class actions.

Applicable California Laws

Labor Code §§ 226.7 and 512 set forth employers’ requirement to “authorize and permit” their non-exempt employees to take meal and rest breaks. Industrial Wage Commission Wage Orders 1-15 and 16 provide additional requirements regarding “on-duty” meal periods. Unless an employee is relieved of all duty during their meal period, the meal period is considered an “on-duty” meal period that is counted as hours worked and must be compensated at the employee’s regular rate of pay.

Labor Code § 203 states that an employer who willfully fails to pay the wages of an employee who is discharged or quits is liable to the employee for a full day’s wages for each day they are paid late, up to a maximum of 30 days. This statutory penalty is referred to as “waiting time penalties.”

Labor Code § 226 sets forth the required components of wage statements, such as the gross and net wages earned. Plaintiffs’ attorneys regularly add these claims to cases involving other Labor Code violations, in order to increase the total number of violations and associated penalties, and to be eligible for Labor Code § 226 attorneys’ fees.

Background Facts

On behalf of a class of current and former employees, Gustavo Naranjo sued his former employer, Spectrum Security Services, Inc. for meal break violations. Spectrum officers are at-will, on-call, hourly, non-exempt employees. Spectrum’s company policies always required on-duty meal periods, for which employees were paid at their regular rate. Until 2007, Spectrum employees did not sign these policies, and Spectrum did not inform them that they could revoke, in writing, the on-duty meal break agreement at any time.

Naranjo alleged that Spectrum failed to provide its security personnel with meal breaks. Naranjo sought premium pay for the denied meal breaks, as well as waiting time penalties, itemized wage statement penalties, and attorneys’ fees.

Naranjo argued that because he and the class did not receive premium pay for missed meal breaks, by default, their wage statements were inaccurate and they were not paid all the wages they were due by the end of their employment with Spectrum. The trial court held that Spectrum had violated Labor Code § 226.7 by failing to inform pre-2007 employees that they could revoke, in writing, the on-duty meal break policy agreement at any time.

The class was owed premium pay as a result of this violation. The trial court also held that Labor Code §§ 203 and 226 penalties were potentially applicable. Based on the finding of inaccurate wage statements, the court awarded attorneys’ fees to Naranjo’s counsel.

California Court of Appeals’ Decision in Naranjo

At issue for the appellate court was whether employees who are entitled to a meal period premium under Labor Code § 226.7 may also recover derivative penalties under Labor Code § 203 (waiting time penalties) and § 226 (inaccurate wage statements). Although Spectrum paid its at-will, on-call, hourly employees for their on-duty meal breaks, it did not pay those employees the one-hour premium for non-compliant meal breaks (given the lack of signed agreements with right-to-revoke clauses).

The court held that “section 226.7 actions do not entitle employees to pursue the derivative penalties in section 203 and 226.” The court reasoned that an employee’s lawsuit for meal break violations is not an action brought for the non-payment of wages, and waiting time penalties are only owed when an employer willfully fails “to pay…any wages” owed to a terminated or voluntarily separating employee.

The court held that because Labor Code § 226 entitles an employee to penalties and attorneys’ fees if the wage statement omits gross and net “wages earned,” a wage statement that correctly lists the wages earned for on-duty meal breaks does not violate Labor Code § 226, even if it omits unpaid premium pay.

The court also held that unpaid premium wages for meal break violations accrued prejudgment interest at seven percent (7%).

Key Takeaways for Employers

While this case involved employees with on-duty (paid) meal breaks, the court’s holding should also apply to employees who take off-duty (unpaid) meal breaks, and to rest break claims as well. The court’s holding that employees cannot prevail on derivative Labor Code §§ 203 and 226 claims solely based on a failure to pay premium wages per § 226.7 is a significant win for employers, because it limits employers’ liability for penalties and attorneys’ fees.

This holding will likely discourage plaintiffs’ attorneys from pursuing claims lacking the potential for penalties and attorney fee awards. Likewise, this holding may decrease employers’ motivation to settle meal and rest break class actions, given the diminished monetary exposure.

Given this holding’s significance, the California Supreme Court may review the decision. Employers should continue to monitor the issue and work with employment counsel to craft meal and rest period policies and practices and ensure wage statement compliance.