By: Joseph Hadacek and Josh Rodine

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.

Can an employee recover wages without pursuing a claim for nonpayment of wages?  Yes, held the California Supreme Court in Tuesday’s decision in Naranjo v. Spectrum Security Services, Inc.   Navigating through a paradox created by its prior decisions, the Court answered in the affirmative, finding that meal and rest premium payments prescribed by the California Labor Code are “wages” subject to California’s wage statement and final pay requirements.  Reversing the Court of Appeal, the Supreme Court held that while a claim for meal and rest premium pay is not an “action for nonpayment of wages,” the actual premium pay is a “wage” because it serves a dual purpose of compensating employees for the hardship of a missed break as well as the work performed during the missed break. While the plaintiffs’ bar won the top prize, the Court gave employers small consolation by confirming the Court of Appeal’s finding that the appropriate rate of prejudgment interest on a meal and rest premium claim was the default rate of seven percent rather than ten percent applicable to wage claims.

So why did the Supreme Court need to make the distinction between the character of a Labor Code section 226.7 claim for meal and rest premiums and its remedy of premium pay?  Because the Supreme Court had previously held, in Murphy and Kirby respectively, that meal and rest premiums were “wages” for statute of limitations purposes—three years, per Code of Civil Procedure section 338—but a claim for those same premiums was not an “action for nonpayment of wages” subject to an award of attorneys’ fees under Labor Code section 218.5.  Former security guard Gustavo Naranjo provided the Court with a vehicle to reconcile Murphy and Kirby—and the split state and federal decisions that followed—presenting the issue of whether a meal and rest period violation can form the basis for derivative claims under Labor Code section 203, for waiting time penalties, or Labor Code section 226(e), for inaccurate wage statements.

In 2007, Naranjo filed a putative class action alleging that his former employer, Spectrum Security Services, failed to pay him meal and rest premium pay, and that Spectrum’s failure to do so created derivative liability for wage statement and waiting time penalties.  Following certification and trial, the trial court found Spectrum liable for failure to pay meal period premiums, and agreed that Spectrum could be subject to derivative wage statement and waiting time penalties.  Spectrum was able to convince the trial court that waiting time penalties were inappropriate because its non-payment of premiums was not willful, but the trial court still imposed derivative wage statement penalties and awarded prejudgment interest at a rate of ten percent.

The Court of Appeal disagreed, however, and reversed the trial court’s determination that meal premium violations could support derivative claims under the wage statement and timely payment statutes. Following Kirby and Ling, the Court of Appeal concluded that section 226.7 premium pay was a statutory remedy and not a “wage,” and neither section 203, which penalizes an employer that willfully fails “to pay … any wages,” nor section 226(e), which entitles an employee to a penalty when the employee’s wage statement omits gross or net “wages earned,” were implicated by a section 226.7 violation.  Following the same reasoning, the Court of Appeal found that section 218.6’s provision for a prejudgment interest rate of ten percent for wage claims was inappropriate and the default rate of seven percent would apply.

The Supreme Court found a different path through the labyrinth. Reversing the Court of Appeal in major part, the Court found that meal and rest premiums served two functions: first, to remedy the hardship that an employee endured by working through a break (and to incentivize employer compliance), and second, to compensate the employee with “wages” owed for 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.”

But employees who miss breaks are already compensated for their work because they are still on the clock, right?  Not quite.  Comparing meal and rest premiums to overtime premium pay, the Court explained that the Legislature intended to provide additional compensation for work performed during a missed break.  And while it is true that overtime premiums are paid on a pro rata basis, other lump sum payments such as reporting time pay and split shift pay are considered “wages.”  With meal and rest premiums now “wages,” at least in part, the final pay and wage statement requirements were well within reach of section 226.7.  Not wanting to undo the holding in Kirby, however, the Supreme Court affirmed that the a ten percent rate of interest would not apply to section 226.7 claims because it was not an “action for nonpayment of wages.”

So what does Spectrum mean for employers?  In short, employers should ensure that all meal and rest premiums are separately listed on employees’ wage statements and are timely paid, and should consider implementing meal and rest attestations at the end of each shift to blunt employees’ claims that they are owed premium pay.  Spectrum is silent on retroactivity, but the Supreme Court’s recent decision in Ferra (regarding the appropriate rate of pay for meal and rest premiums) suggests that a good faith reliance on prior decisions such as Ling and Kirby may not be sufficient to avoid liability for non-compliance prior to Tuesday.  Nor is it clear how the decision will impact courts’ approach to wage statement liability or whether other unpaid wages are now subject to reporting on wage statements.  But employers should still be able to defend against wage statement claims by showing that they were not knowing or intentional, and final pay claims by showing that any non-compliance was not willful.  For now, at least.