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  • More Liability for California Employers as Court Rules Meal and Rest Period Premiums are Wages

    In what could probably be classified as anything but surprising news, California employers were recently, once again reminded that meal and rest period compliance is a complex, always evolving and often costly facet of being an employer.

    On May 23, the California Supreme Court issued its decision in Naranjo v. Spectrum Security Services, Inc., and found that meal and rest period premiums are in fact “wages” under California law, meaning that employers will be potentially liable for not properly reporting them, thereby triggering derivative claims for waiting time penalties and wage statement penalties.

    And, lest we forget, the decision is likely to apply retroactively.

    Before you begin the process of auditing your final pay practices, please take a few minutes to continue to our blog for a summary of this important decision for all California employers.

    California Supreme Court Rules on Whether Meal Break Premium Is Penalty or Wage

    If you don’t give an employee required rest breaks or meal breaks, you must provide additional pay for each day with a missed break. But is that payment also a wage that needs to be reported on a pay stub and paid at termination, with each failure to do so carrying additional penalties? Or are the penalties not subject to those two statutory fines? Those questions—and more—were recently answered by the California Supreme Court.

    Prison Guards Can’t Get a Break

    Spectrum Security Services, Inc., provides secure custodial services to federal agencies. The company transports and guards prisoners and detainees who require outside medical attention or have other appointments outside custodial facilities. Gustavo Naranjo was a guard for Spectrum who was suspended and later fired after leaving his post to take a meal break, in violation of a company policy that required custodial employees to remain on-duty during all meal breaks.

    Naranjo filed a class action on behalf of Spectrum employees alleging the company had violated state meal break requirements and seeking an additional hour of pay—commonly referred to as “premium pay”—for each day Spectrum failed to provide employees a legally compliant meal break.

    Three Years of Meal Break Violations

    Under the governing wage order, an employer ordinarily must provide covered employees an off-duty meal period on shifts lasting more than five hours. An exception allows for “on-duty” meal periods if “the nature of the work prevents an employee from being relieved of all duty,” but only when “by written agreement between the parties an on-the-job paid meal period is agreed to.” Spectrum had always required on-duty meal periods as company policy because of the nature of its guards’ work, but it didn’t have a valid written on-duty meal break agreement with its employees for the period from June 2004 to September 2007.

    A jury found Spectrum not liable for the period beginning on October 1, 2007, after the company had circulated and obtained written consent to its on-duty meal break policy. Spectrum didn’t seek review of the lower courts’ determination that it violated state meal break requirements from June 2004 to September 2007, and the class members were entitled to premium pay for that period.

    Is Award a Wage?

    Naranjo’s complaint also alleged two California Labor Code violations related to Spectrum’s premium pay obligations. The company was required to report the premium pay on employees’ wage statements and timely provide the pay upon their discharge or resignation, but it allegedly had done neither. The complaint sought the damages and penalties prescribed by those statutes as well as prejudgment interest.

    The trial court found that untimely payments could trigger penalties but said no penalties were owed here because Spectrum’s delay wasn’t willful. The California Court of Appeal upheld the ruling, but on very different grounds. It concluded that even a willful failure to pay amounts owed under Labor Code Section 226.7 doesn’t trigger Section 203 waiting-time penalties. As the Supreme Court framed the questions:

    When an employer unlawfully denies an employee a meal or rest period and thus becomes obligated to pay an extra hour’s pay, can the employer be held liable under Labor Code Section 203 if it fails to pay any unpaid missed break amounts within statutorily mandated deadlines?

    And can it be held liable under Labor Code Section 226 if it fails to report that premium pay on a statutorily required wage statement?

    It’s a Wage! It’s a Penalty! It’s Both!

    The Labor Code defines the term “wages” to include “all amounts for labor performed by employees of every description, whether the amount is fixed or ascertained by the standard of time, task, piece, commission basis, or other method of calculation.” The court of appeal reasoned the penalty at issue was beyond the reach of the wages definition because it is a legal remedy, not payment for labor: The premium pay is owed to employees not for work they performed but as a sanction on account of “the employer’s recalcitrance” regarding meal breaks.

    The supreme court disagreed and said the conclusion rests on a false dichotomy: that a payment must be either a legal remedy or wages. Even though it is mandated by the relevant statute and wage order, an employee becomes entitled to premium pay because she was required to work when she should have been relieved of duty—required to work too long into a shift without a meal break, required in whole or part to work through a break, or, as was the case here, required to remain on-duty without an appropriate agreement in place authorizing on-duty meal breaks.

    In this respect, the court found missed-break premium pay comparable to overtime premium pay, both to compensate the employee for the hardship incident to such work and to deter the employer from routinely imposing such obligations. That the premium pay serves as a remedy for a legal violation doesn’t change the fact it also compensates for labor performed under conditions of hardship. One need not exclude the other.

    Are Meal Break Payments Subject to Penalties?

    The supreme court made quick work of Spectrum’s technical objections to liability under either the reporting statute or the statute requiring payment of wages upon termination.

    Spectrum argued it can’t be liable for failure to report missed-break premium pay on employee wage statements because those amounts weren’t actually paid, and nothing in the statute requires an employer to report amounts not paid during a pay period. The court of appeal found this argument contrary to the statutory text, which requires an employer to accompany “each payment of wages” with “an accurate itemized statement” specifying, among other details, the “gross wages earned” and “net wages earned”—in other words, all amounts earned and now owing, not just the amounts actually paid. A statement that conceals amounts earned, on the grounds they also weren’t paid, is not an accurate statement

    Moreover, the court noted that permitting employers to conceal underpayments—including owed but unpaid missed-break premium pay—would impede employees’ ability to verify they have been paid properly and would undermine administrative enforcement of wage and hour protections

    In sum, the supreme court held an employer’s obligation to report and timely pay wages earned includes an obligation to report and provide premium pay for missed breaks and can support monetary liability under the Labor Code.

    7% Solution

    The California Constitution establishes a default interest rate of 7%, absent law to the contrary. The trial court awarded interest on the award at 10%, the interest amount applicable to employment contracts. The court of appeal imposed the 7% interest rate instead. The California Supreme Court agreed the legislature has not understood the failure to pay missed-break premium pay as a breach of contract subject to statutory contract-rate interest, so the 7% rate applied.

    The supreme court has settled several important legal doctrines in this decision, but not whether penalties are available in this particular case. Because the court of appeal didn’t address Naranjo’s argument that the trial court erred in finding Spectrum had not acted knowingly or willfully in its failure to report missed-break premium pay on wage statements, those issues were sent back to the court of appeal. Naranjo v. Spectrum Security Services, Inc., Supreme Court of California, May 23, 2022, Case No. S258966.

    Bottom Line

    The small amount of good news in this decision for employers is the recognition of a 7% interest rate on these particular awards. After a decade of statutory interest being at multiples of the actual market interest rate, that divergence appears to be over for the moment.

    Beyond that, this case is further evidence, as if it were needed, of the supreme court’s inclusive reading of remedial California employment laws. No doubt, the court is reading Sacramento accurately. For your planning purposes, if there is an expansive reading of a statute or regulation, expect it to apply.

    Article courtesy of content partner BLR.  Author Mark I. Schickman is Editor of the California Employment Law Letter and the founder of Schickman Law in Berkeley, California.