On May 23, 2022, after a nearly two-and-a-half year wait, the California Supreme Court issued its decision in the case of Naranjo v. Spectrum Security Services, Inc. The decision answers a very important question for California employers: May a California employee pursue so-called “paystub penalties” and “waiting time penalties” due to a failure to pay or report meal and/or rest period premiums in a timely manner? With its decision, the Court unambiguously answered, “yes.” The holding raises the already high stakes for meal and rest period compliance by California employers.

Meal and Rest Period Obligations Generally

For decades now, California law has required employers to provide timely meal and rest periods to California employees. While the full extent of these requirements could occupy its own blog post, employers generally must provide a duty-free meal period of not less than 30 minutes commencing before the end of the fifth hour of work, and a second duty-free meal period of not less than 30 minutes commencing before the end of the tenth hour of work for employees who work more than ten hours. Under very limited circumstances, employees may voluntarily waive their rights to a meal period.  California employers must also provide employees with a duty-free rest period for every four hours of work or major fraction thereof. (A “major fraction” of four hours is anything greater than two hours in each four-hour block of time (e.g., two hours and one minute).

In any circumstance where the meal and/or rest period is not “provided” in full compliance with the law, the employee is entitled to meal and/or rest period “premium pay” equivalent to one hour of work at the employee’s regular rate of pay. The phrase “provide” is interpreted by case law to mean that the employer must authorize and permit the employee to take the meal and/or rest period, relieve the employee of all duty, relinquish all control over the employee, and do nothing to impede or discourage the employee from taking the meal and/or rest period. An employee is only entitled to a maximum of one meal period premium and one rest period premium per workday (i.e., a total of two premiums), regardless of the number of meal and/or rest period violations that occur in a given workday.

Wage Statement Obligations (“Paystub Penalties”)

California law (Labor Code section 226) requires that employers, at the time of payment of wages, furnish each employee with an accurate itemized statement showing (1) gross wages earned, (2) total hours worked by the employee, except for any employee whose compensation is solely based on a salary and who is exempt from payment of overtime under subdivision (a) of Section 515 or any applicable order of the Industrial Welfare Commission, (3) the number of piece-rate units earned and any applicable piece rate if the employee is paid on a piece-rate basis, (4) all deductions, provided that all deductions made on written orders of the employee may be aggregated and shown as one item, (5) net wages earned, (6) the inclusive dates of the period for which the employee is paid, (7) the name of the employee and the last four digits of his or her social security number or an employee identification number other than a social security number, (8) the name and address of the legal entity that is the employer and, if the employer is a farm labor contractor, as defined in subdivision (b) of Section 1682, the name and address of the legal entity that secured the services of the employer, and (9) all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee.

Any California employer who fails in these reporting obligations to its employees may be liable for a statutory penalty of fifty dollars ($50) for the initial pay period in which a violation occurs and one hundred dollars ($100) for each violation in a subsequent pay period, not to exceed an aggregate penalty of four thousand dollars ($4,000). An employee who successfully proves a violation of this section is also entitled to an award of costs and reasonable attorneys’ fees.

Obligation to Timely Pay Wages (“Waiting Time Penalties”)

California Labor Code section 203 provides that if an employer willfully fails to pay any wages of an employee who is discharged or quits, the wages of the employee shall continue as a penalty from the due date thereof “at the same rate until paid or until an action therefor is commenced,” but not more than 30 days. As with the wage statement obligations discussed above, an employee who successfully proves an employer’s willful failure to timely pay wages may recover their costs and reasonable attorneys’ fees.

The Question Answered By Naranjo

In any action for unpaid wages in California, it is very common for a plaintiff-employee to seek to recover not only the unpaid wages, but also penalties for non-compliant wage statements and for failure to pay all wages due and owing at termination. The theory behind this approach is that the unpaid sum is “wages” under California law, which must be accurately reported on the employee’s wage statement under Labor Code section 226(a), and must be fully paid at the time of termination under Section 203. If wages were earned during a particular pay period, but omitted from the wage statement because they were not paid, that is a “derivative” wage statement violation. If wages were earned during the employee’s employment and then the employee was terminated without such wages being paid, that is potentially a waiting time violation.

With that context in mind, the decision in Naranjo turned on whether or not the meal or rest period premium pay is a “wage” for purposes of California’s wage statement and timely payment of wages at termination statutes (Sections 226 and 203)?[1]

If the answer is “yes,” then an employee may pursue the statutory penalties articulated in Sections 226 and 203, which correspondingly provide an avenue for the employee to seek an award of reasonable costs and attorneys’ fees.

If the answer is “no,” then an employee who is able to successfully prove a meal or rest period violation is not entitled to statutory penalties under Sections 226 and 203, and, without more, is not entitled to an award of attorneys’ fees and costs. This is because the same California Supreme Court that issued the Naranjo decision also held in 2012[2] that attorneys’ fees and costs cannot be recovered in a case alleging only failure to pay meal and rest period premiums. Therefore, unless derivative claims can be made under Section 226 or 203, a claim for failure to provide meal or rest periods will not permit an award of attorneys’ fees.

As mentioned above, the Court in Naranjo held that the meal and rest period premiums are, in fact, a “wage” for purposes of Labor Code section 226 and 203.

This means that a California employer which does not report on the employee’s paystub the meal and/or rest period premiums paid to its California employees, each pay period, as part of the employee’s gross and net “wages” under Section 226(a)(1) and (5), may be found to have knowingly violated Section 226. Such a finding would entitle to employee who brings the claim to a statutory penalty of up to $4,000, and his or her reasonable attorneys’ fees and costs for proving the violation.

It also means that if a California employer terminates the employment of a California employee without paying all of the meal and/or rest period premiums to which the employee was entitled during their employment, and the failure to pay those premiums is determined to be “willful,” the employee is entitled to a statutory penalty equivalent to 30 days’ pay, and his or her reasonable attorneys’ fees and costs for proving the violation.

As A California Employer, Why Should I Care About Naranjo?

For several reasons, but first and foremost, money. More specifically, the amount of money that a California employer may have to pay to an employee who successfully proves an employer’s failure to provide compliant meal or rest periods or to pay meal or rest period premium pay when required by law.

An individual employee’s ability to seek and recover the statutory penalties in Sections 226 and 203 in addition to any meal or rest period premiums and to recover attorneys’ fees and costs for violations of Sections 226 and 203 significantly ups the ante for California employers. Consider that California courts routinely award attorney fees and costs in an amount that significantly exceeds the wage and penalty amounts recovered by the employee in litigation. Where the employee who proved meal and/or rest period violations pre-Naranjo, without more, did not have an avenue to recovery his or her attorney fees and costs, now that path is open to the employee. They will have to prove that the wage statement violation was “knowing and intentional” and/or that the failure to pay the premiums upon termination of employment was “willful,” but the bar is relatively low with respect to an employee’s ability to make such a showing.

Consider the following potential exposure for a single meal period violation proved by a single full-time employee earning only the California minimum wage with an employer with 25 or fewer employees, before and after Naranjo:

Thus, even without the possibility of attorney fees and costs, the potential exposure for a single meal or rest period violation for each impacted employee now skyrockets from $14 in the example above to $3,424.

Another reason, building on the first, is summed up in two words: Class actions. While the potential exposure for an individual claim for violation of California’s meal and rest period laws is clearly staggering, now consider that such claims are routinely brought on a class action basis, i.e. that one employee brings meal and rest period claims on behalf of themselves and on behalf of a “class” of similarly situated current and former employees. A class may be comprised of anywhere from a few dozen to more than ten thousand employees depending on the size of the employer. Also, consider that the statute of limitation or “lookback period” for violation of Sections 226 and 203 is one (1) year and three (3) years respectively. This also increases the potential size and scope of a wage and hour class action case. Even small employers are likely to have a few dozen former employees over the course of the past three years. To weigh the potential impact of a wage and hour class action lawsuit for violation of meal and rest period requirements for a class of minimum wage employees, multiply $3,424 by 50, 100 or 1,000 (number of employees in the class), plus the class attorney’s fees and costs, and consider what that sort of exposure would mean to your business.

Note that if your employees earn a higher hourly rate of pay than minimum wage, earn other compensation outside their hourly rate of pay that would be included in their regular rate of pay, or may be able to prove dozens or hundreds of meal and/or rest period violations, your exposure will increase correspondingly.[3]

Finally, consider that in the past six years the California Supreme Court has issued a bevy of cases concerning employers’ meal and rest period obligations that were favorable to employees. For example:

• Augustus v. ABM Security Services, Inc. – Holding that employees must be relieved of all duty during rest periods even though it is paid time for the employee and leading the California Labor Commissioner to reverse its decades-long position that employers could require employees to remain on work premises during rest periods;
• Donohue v. AMN Services, LLC – Holding that employers may not “round” the meal period punches of employees and holding that meal period punches that show a potential meal period violation create a rebuttable presumption at both the class certification and summary judgment stage that the employer did not “provide” the meal period for the workday in question;
• Ferra v. Loews Hollywood Hotel, LLC – Holding that meal and rest period premiums must be paid at an employee’s regular rate of pay as opposed to the employees “base” or “normal” rate of pay.

Now we add Naranjo to this list. Thus, the writing is on the wall regarding the direction that it appears the California Supreme Court is moving in terms of meal and rest period compliance. Employers should take note when grappling with any “grey areas” of meal and rest period compliance.

What Should California Employers Do Now?

Meal and rest period compliance should occupy as important a position as any other wage and hour issue that any California employer is facing. Simply put there is no substitute for meal and rest period compliance.

We recommend several best practice strategies for increasing compliance, such as incorporating meal and rest period requirements into an employer’s attendance policy and/or standards of conduct, carrying out routine “spot checks” of employee time records to monitor ongoing meal period compliance, implementing an automated “flagging” system in their payroll software to notify the employer of non-compliant meal period punches, using a formalized process for employees to report occasions when not fully provided a compliant meal or rest period, and/or carrying out regular trainings for both supervisory and non-supervisory employees on meal and rest period rules and policies. Our office would be happy to work with any California employer to discuss how best to execute these strategies and our attorneys have collectively delivered hundreds of such trainings. We also encourage you to attend our June 8, 2022 California Mid-Year Employment Law Update live  interactive webinar where we will discuss the Naranjo decision and other important developments in the law in more detail. To sign up for the live webinar, visit the Events page at www.suttonhague.com.   (A recording of this webinar will be available for purchase at www.calnevalaw.com following the webinar.)

Further, the importance of having compliant, regularly updated written meal and rest period policies, and taking steps to ensure that your employees read and understand these policies, has never been higher. Since its inception, Sutton Hague Law Corporation has provided Employee Handbook drafting and updating services to its clients. We can closely scrutinize your existing handbook to ensure compliance or assist you in updating a current handbook. We have also developed PolicyMall® to make the process of handbook preparation and revision more efficient than ever.

The Naranjo decision also gives California employers another compelling reason to consider adopting arbitration agreements with class action waivers between them and their employees. Although there are aspects of California’s law pertaining to adoption and enforcement of arbitration agreements that are still undetermined, a California employee may at least voluntarily enter into an arbitration agreement with his or her employee under which he or she also waives the right to prosecute any wage and hour-related claims on a class action basis. While the question of whether such waivers could also apply to representative actions under the California Private Attorneys General Act of 2004 (PAGA) is currently under review by the United States Supreme Court as of the time this article is first published, the benefits of an arbitration agreement with a class action waiver are undeniable in the wake of Naranjo. We strongly urge employers who do not have such agreements to reconsider their adoption and to discuss with our attorneys the pros and cons of arbitration agreements. Sutton Hague Law Corporation has drafted arbitration agreements with class action waivers for its clients that have withstood judicial scrutiny on multiple occasions.

Finally, for California employers who know that they have meal and rest period liability lurking in the background, there are also strategies that we can discuss with you for mitigating or eliminating your liability before you find yourself on the receiving end of a meal and/or rest period claim from one or more of your employees.

[1] Naranjo also addressed the correct statutory rate of interest that applies to awards of meal and/or rest period premiums (it is 7% rather than 10%), that holding is far less impactful and will not be discussed in detail here.

[2] In the 2012 decision Kirby v. Immoos Fire Protection, Inc., the California Supreme Court held that meal and rest period premiums are not a wage for purposes of the fee-shifting provisions of Labor Code section 218.5, and therefore employers and employees cannot recover attorney fee and costs from one another for violation of California’s meal and rest period requirements regardless of which side prevails in the lawsuit.

[3]  For information regarding the proper calculation of an employee’s “regular rate of pay,” which is necessarily equivalent to the employee’s standard hourly rate, see the Department of Labor Fact Sheet #56A, and Section 49 of the DLSE Enforcement Manual.