Is Good Faith Good Enough? The Current State of California’s Employment Landscape

Despite being employee-friendly, California is no stranger to its share of labor-based compliance setbacks. Best Lawyers highlights a recent labor code debate.

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Image by iStock/AldoMurillo


Gregory Sirico

June 28, 2024 12:00 AM

Long touted as an employee-friendly state with legislation to back it, California employers are all too accustomed to how difficult it can be to navigate through administrative and compliance setbacks. Even for the most diligent of employers, the difference between compliance and the other end of the law for minor, unintentional errors are slim, all resulting in stringent, increasingly expensive financial penalties. For example, under California Labor Code Section 226, employers are required to provide an accurate, written itemized wage statement to all employees, with failure to comply resulting in statutory penalties of up to $4,000 per employee or the employee’s accrued damages, whichever value is greater.

In this prolonged legislative debate, an evident division in authority among California’s intermediate appellate courts has emerged regarding the applicability of if a good faith defense applies to claims for employment penalties under Labor Code Section 226. However, on May 6, 2024, California employers were offered a welcomed development when the state Supreme Court resolved the authority split in the case of Naranjo v. Spectrum Security Services, Inc., unanimously settling the jurisdictional dispute and affirming that an employer’s “objectively reasonable, good faith belief” that it has issued employees compliant wage statements precludes an award of penalties under Section 226.

California employers may avoid pending liability for monetary penalties under Section 226 if they can demonstrate an 'objectively reasonable and good faith belief in the accuracy of their wage statements.'"

The ruling, which stems from a case first filed in 2007 by security guard Gustavo Naranjo, is only the latest checkpoint in what has been an uphill employment battle. The initial putative class action claims alleged Spectrum Security Services, Naranjo’s former employer, violated California’s labor law by failing to provide both meal breaks and premium pay. Additionally, the suit went on to further allege that Spectrum also failed to pay meal period premiums in a timely fashion or report it in employees’ wage statements. In court, Spectrum quickly argued against these claims, stating the company was exempt from state mandated meal break requirements as a federal contractor. Initially, the court granted summary judgment to Spectrum, but that decision was reversed on appeal and sent to the state Supreme Court for judgment.

Despite the language of the statute explicitly stating that penalties are recoverable for knowing and reporting violations, a split in authority regarding the meaning of that language remained. Following this crucial legislative news, the California Supreme Court has provided a clear interpretation of the labor code’s language, offering clarity on the matter for future employment-based disputes. All that being said, let it be noted that California employers may avoid pending liability for monetary penalties under Section 226 if they can demonstrate an “objectively reasonable and good faith belief in the accuracy of their wage statements,” as stated in the official decision.

This decision represents a landmark victory for California’s employers currently facing claims for wage-statement violations based on alleged violations of the state’s Labor Code. However, in order to defeat a wage statement claim based on the good faith defense, employers must still demonstrate they had a reasonable basis to believe their wage statements followed state law. Given this news, employers should remain cognizant and be prepared to cite evidence of any objectively reasonable mistake or uncertainty in the law to support their good faith defense.

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