California Supreme Court Holds Wage Statement and Final Pay Laws Apply to Meal and Rest Period Premium Pay

California law requires employers to provide meal and rest periods to most non-exempt employees.  Pursuant to Labor Code section 226.7 and the Industrial Welfare Commission Wage Orders, if an employer fails to provide an employee with a proper meal or rest period, the employer must pay the employee an additional hour of pay, commonly referred to as “premium pay.”  Recently, in Naranjo v. Spectrum Security Services, Inc., the California Supreme Court held that premium pay for such missed meal and rest periods constitutes “wages” that must be reported on employee wage statements pursuant to Labor Code section 226.  Furthermore, the Court held that this premium pay for missed meal and rest periods must be paid by the statutory deadline when an employee separates from the job.  As a result of the Court’s decision, premium pay for missed meal and rest periods are now subject to waiting time penalties under Labor Code section 203 if an employer does not timely pay an employee premium pay following termination of employment.  Below is a summary of Naranjo’s impact on missed meal and rest period premium pay.

Factual Background

Defendant Spectrum Security Services, Inc. (“Spectrum”) provides custodial services and transports and guards prisoners and detainees who require outside medical attention or have appointments outside custodial facilities.  Plaintiff Gustavo Naranjo was a former guard for Spectrum and filed a putative class action lawsuit in Los Angeles County Superior Court on behalf of Spectrum employees alleging that Spectrum had violated meal period requirements under the Labor Code and the applicable Wage Order.  The lawsuit sought premium pay for each day on which Spectrum failed to provide employees a legally compliant meal period.  Naranjo’s complaint also alleged that Spectrum was required to report the premium pay on employees’ wage statements, and timely provide premium pay to employees upon their discharge or resignation, but had done neither.  As a result, the lawsuit sought penalties prescribed by Labor Code sections 203 and 226 and prejudgment interest.

Superior Court and Court of Appeal Decisions

The Superior Court certified a class for the meal period claim and related claims for wage statements and timely payment of premium pay.  At trial, the court directed a verdict for the employee class on the meal period claim, and also concluded that the obligation to supply meal period premium pay also carried with it reporting and timing obligations.  The court concluded Spectrum’s wage statement omissions were intentional and awarded penalties pursuant to Labor Code section 226.  However, the court found that the failure to make timely payment was not willful, so Spectrum was not liable for waiting time penalties pursuant to Labor Code section 203.  As a result, the court entered judgment for the plaintiff class on the meal period and wage statement claims and awarded prejudgment interest at a rate of 10 percent.

Both parties appealed to the Second District Court of Appeal.  The Court of Appeal eventually affirmed the Superior Court’s determination that Spectrum violated the meal period requirements under the Wage Order, but reversed the Superior Court’s order that a failure to pay meal period premiums could support claims under the wage statement and timely payment statutes.  It also reduced the rate of prejudgment interest from 10 percent to seven percent.

Both parties then appealed to the California Supreme Court, which subsequently granted review to consider the issue of whether the wage statement and timely payment statutes apply to missed meal and rest period premium pay.

California Supreme Court Decision

In Naranjo, the California Supreme Court addressed the following three issues:

1. An Employer Can be Liable for Labor Code Section 203 Waiting Time Penalties if It Fails to Issue Missed Meal and Rest Period Premium Pay within the Statutory Deadlines for Final Wages

When an employment relationship comes to an end, the Labor Code requires an employer to pay any unpaid wages to the departing employee.  The law sets different payment deadlines depending on the manner of departure.  If an employee is discharged from their employment, unpaid wages are due immediately upon termination of employment.  (Lab. Code § 201.)  If the employee resigns, unpaid wages are due within 72 hours of the employee’s resignation, or at the time of separation if the employee has given more than 72 hours’ advance notice.  (Lab. Code § 202.)  An employer who “willfully fails to pay” the full amount due is liable for waiting time penalties at the employee’s daily rate of pay for each day the wages go unpaid, for a maximum of 30 days.  (Lab. Code § 203.)

Following this, the Court held in Naranjo that the premium pay for missed meal and rest periods constitutes “wages” for purposes of Labor Code section 203 waiting time penalties because “an employee becomes entitled to premium pay for missed or noncompliant meal and rest periods precisely because she was required to work when she should have been relieved of duty.”  As such, when an employer willfully fails to pay an employee for such premium pay, the Court noted that “making penalties available serves the purpose underlying Labor Code section 203:  to incentivize employers to pay end-of-employment compensation when it is due, rather than forcing employees to seek administrative relief or to go to court.”

2. An Employer Can Also Be Liable for Labor Code Section 226 Wage Statement Penalties if It Fails to Report Missed Meal and Rest Period Premium Pay on an Employee’s Wage Statement

An employer is also required under California law to provide employees accurate itemized statements, in writing, which show certain information, including gross wages earned and net wages earned.  (Lab. Code § 226.)  Employees who are injured by a “knowing and intentional failure by an employer” to comply with this requirement may recover the greater of actual damages or $50 for the initial pay period in which a violation occurs and $100 per employee for each violation in a subsequent pay period, not to exceed a total penalty of $4,000 per employee, as well as costs and attorney’s fees.

In Naranjo, the Court explained that Labor Code section 226 requires an employer to accompany “each payment of wages” with “an accurate itemized statement” specifying, among other items, the “gross wages earned,” “net wages earned,” and the “hours worked” at each rate, not just those amounts paid.  Furthermore, the Court noted that an “injury” occurs under Section 226 whenever the employee cannot easily determine the required information, including rates of pay and all hours worked at each rate, and allow the employee to determine whether the payment is correct.  Section 226.7 requires an employer to pay “one additional hour of pay” for each day in which a lawful meal or rest period is not provided.  In such situations, the Court held that both the additional credited hour of work and the corresponding premium pay must be reported on the wage statement.

As a result, the Supreme Court held that an employer’s obligation under Labor Code section 226 to report wages earned includes an obligation to also report premium pay for missed meal and rest periods.  This means that failure to report premium pay on an employee’s wage statement can now support liability under Section 226 for failure to supply an accurate itemized statement reflecting an employee’s gross wages earned, net wages earned, and credited hours worked.

3. Application of Prejudgment Interest

Finally, the Court agreed with the Court of Appeal that the seven-percent default rate set by the California State Constitution is the applicable rate of prejudgment interest to any amounts due based on an employer’s failure to provide meal and rest periods.  However, the Court explained that while premium pay is now considered “wages,” any such claim under Section 226.7 related premium pay amounts not noted on an employee’s itemized wage statement is not an “action for wages” that would trigger a 10-percent prejudgment interest rate.  As a result, the Court held that prevailing parties in these matters are only entitled to the seven-percent prejudgment interest absent a statute specifying a higher rate.

Conclusion

Going forward, California employers need to review their existing practices to ensure that if an employee is owed premium pay for a missed meal or rest period, those premium payments must be listed on the employee’s wage statements.  California employers must also make sure to include any owed premium pay in an employee’s final wages when an employee leaves the job.

Boutin Jones’ Employment Law Group attorneys are available to assist employers to provide legal advice on the impacts of this recent case, and to answer any other questions you may have regarding compliance with meal and rest period law