California law 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. The state’s labor code provides that if a claimant demonstrates 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.

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

The California Supreme Court recently ruled in favor of an employer in such a case. The question presented before the court was whether the employer knowingly and intentionally failed to comply with Labor Code Section 226’s requirements when the employer had a good faith, yet erroneous, belief that it was in compliance.

The court had to determine whether the law requires employers to treat “premium pay awarded for the deprivation of a lawful meal or rest break” as wages earned under provisions that penalize the willful failure to timely pay wages to former employees (Labor Code Section 203). Additionally, the court considered whether this premium pay should be reported as wages earned in compliance with Labor Code Section 226.

The court indicated the answer to the question of Labor Code Section 203 penalties was clear. Under long established law an employer cannot incur civil or criminal penalties for the willful nonpayment of wages when the employer reasonably and in good faith disputes that wages are due.

The defendant security company provided secure custodial services to federal agencies, transporting and guarding prisoners and detainees who required outside medical attention or had other appointments outside custodial facility. The plaintiff worked as a guard for the defendant. The plaintiff was suspended and later fired after leaving his post to take a meal break, in violation of defendant’s policy that required custodial employees to remain on duty during all meal breaks.

The plaintiff filed a putative class action on behalf of defendant’s employees alleging, among other things, the defendant had violated state regulations governing meal breaks. The complaint sought an additional hour of pay — known as premium pay — for each day the defendant failed to provide employees a legally compliant meal break.

The defendant argued they were not liable under Section 203 and Section 226 because premium paid awarded under Section 226 is not “wages” subject to statutory timing and reporting requirements, but instead a penalty for break violations.

The trial court found the defendant had, in fact, violated Section 203 and 226 by failing to pay and report the missed-break premium pay as wages in accordance with those provisions. But the court issued a split decision on the question of penalties. With respect to Section 203 penalties, the court ruled in the defendant’s favor. However, with respect to Section 226 penalties, the court ruled against the defendant finding they were liable for penalties because of its failure to report premium paid or missed meal breaks in the employee’s wage statements was “knowing and intentional and not inadvertent.”

The Court of Appeal affirmed the trial court’s holding that the defendant had violated meal break laws. But it reversed the trial court’s holding that the defendant had violated Section 203 and Section 226 by failing to timely pay and report the meal break premium pay owed as “wages,” reasoning that the premium paid was instead in the nature of a penalty rather than compensation for work performed.

The California Supreme Court, after a lengthy discussion, held that an employer’s objectively reasonable, good faith belief that it has provided employees with adequate wage statements precludes an award of penalties under Section 226, Subdivision (e)(1). An employer that believes reasonably and in good faith, albeit mistakenly, that it has complied with wage statement requirements does not fail to comply with those requirements knowingly and intentionally.

The court further pointed out there was no genuine question that the defendant had a reasonable good faith basis for believing it was complying with California wage and hour law. Therefore, the court affirmed the decision of the Court of Appeals and held that the defendant’s failure to include unpaid meal premiums in its employees’ rate statements was not “knowing and intentional” within the meaning of Section 226, Subdivision (e) (1) and the judgment of the Court of Appeal was affirmed.