Seyfarth Synopsis: The California Supreme Court recently determined that meal and rest period premium payments are subject to the final pay timing requirements of Labor Code section 203 and the wage statement reporting requirements of Labor Code section 226(e). Additionally, the prejudgment interest rate for violating these sections is seven percent. Naranjo v. Spectrum Security Services, Inc.
Facts
On June 4, 2007, Gustavo Naranjo filed a putative class action on behalf of Spectrum Security Services, Inc.’s California-based non-exempt employees, alleging that Spectrum failed to pay him meal and rest premium pay pursuant to Labor Code section 226.7, and that Spectrum’s failure to do so resulted in violations of Labor Code section 203 for failing to pay all wages owed upon separation of employment, as well as Labor Code section 226(e) for failing to furnish accurate wage statements.
The Trial Court Decision
The trial court certified a class based upon Naranjo’s meal period (but not rest break) claims, as well as his derivative waiting time and wage statement claims. At trial, a jury found Spectrum liable for failure to pay meal period premiums.
The trial court then concluded that section 226.7’s requirement to provide meal period premiums triggered the final pay and wage statement requirements of sections 203 and 226(e), respectively. The trial court found Spectrum liable for derivative wage statement violations, but not final pay violations because Spectrum’s failure to timely pay meal period premiums was not willful. The trial court entered judgment for the class on the meal period and wage statement claims, and awarded prejudgment interest at a rate of ten percent.
The Court of Appeal’s Decision
The Court of Appeal affirmed the trial court’s determination that Spectrum was liable for failure to pay meal period premiums, but reversed the trial court’s order that a failure to pay meal period premiums could support derivative claims under the wage statement and timely payment statutes. The Court of Appeal further determined that the appropriate rate of prejudgment interest was seven percent—the default rate under the California constitution—rather than ten percent, as is awarded on claims for wage damages.
The Court of Appeal concluded that section 226.7 premium pay was a statutory remedy and not a “wage.” As such, section 203, which penalizes an employer that willfully fails “to pay … any wages” owed to a separating employee was not triggered by a violation of section 226.7. Likewise, the Court of Appeal held that section 226(e), which entitles an employee to a penalty when the employee’s wage statement omits gross or net “wages earned,” was not triggered when an the employer failed to include section 226.7 premium payments in an employee’s wage statement. Finally, the Court of Appeal found that section 218.6’s provision for a prejudgment interest rate of ten percent for wage claims was inappropriate because a section 226.7 claim is not an action for nonpayment of wages, and therefore the default rate of seven percent would apply.
The California Supreme Court’s Decision
The California Supreme Court reversed the appellate court in major part, holding that violations of section 226.7 do give rise to derivative penalties under sections 203 and 226(e), but affirmed the minor holding that the default seven percent rate of prejudgment interest for section 226.7 premium pay was appropriate.
The Court held that, while section 226.7 premium payments are statutory remedies designed to deter employers from requiring employees from working through breaks, premium payments also are “wages” that the employee earns by virtue of work performed during the break period. The Court rejected the argument that the Legislature’s use of the term “pay” in section 226.7 in lieu of the term “wages” was determinative, as the Court had previously found that the term “pay” is synonymous with “wages” and “compensation.”
The Court compared meal period and rest break premium payments to overtime wages, finding that both are designed to compensate an employee for hardship (i.e., working more than eight hours in a day or working through a required break), as well as to shape employer conduct (to provide meal periods and rest breaks, and avoid scheduling shifts longer than eight hours). Although section 226.7 premiums are paid in lump sums (calculated at one hour of the employee’s regular rate of pay for any meal or rest period violation), rather than based on the amount of time worked as is the case for overtime pay, the Court noted that other lump sum payments such as reporting time pay and split shift pay are considered “wages” under applicable Wage Orders.
Based upon the finding that the premium payments are “wages,” the Court reasoned that section 226.7 premium payments are subject to the final pay requirements of section 203. Similarly, the Court found that the premium payments must be reported on employees’ wage statements, as section 226(e) requires reporting of “wages earned” and employees “earn” a section 226.7 premium payment for the work they perform during a missed, short, or late meal or rest break.
The Court went on to explain that although section 226.7 premium payments are “wages”, consistent with its prior holding in Kirby v. Immoos Fire Protection, a claim under section 226.7 is not an “action for wages” as would trigger a ten percent prejudgment interest rate. Therefore, the standard seven percent prejudgment interest rate applies.
The Court’s decision leaves open several related issues. The Court remanded the case back to address the viability of Spectrum’s affirmative defenses that it did not “knowingly and intentionally” violate section 226(e), and that any failure to pay final wages was not “willful.”
What Naranjo Means for Employers
It is now clear that employers must include, and separately list meal and rest break premium payments on their wage statements, and ensure that such premiums are paid on termination or separation of employment. It remains to be seen, however, whether Naranjo applies retroactively, whether employers can still assert affirmative defenses to derivative claims by showing that a section 226(e) wage statement violation was not “knowing and intentional,” or that a section 203 final pay violation was not “willful.” In light of the decision, employers should ensure that break premiums are separately listed on their wage statements and are included in any final pay.