A recent Court of Appeal decision provides some good news for California employers facing wage and hour litigation.  In Naranjo v. Spectrum Security Services, Inc., the Court of Appeal held that an employer's violation of Labor Code section 226.7 for noncompliant meal breaks does not give rise to derivative causes of action under Labor Code section 203 for waiting time penalties or section 226 for itemized wage statement penalties. 

Background

The defendant, Spectrum Security Services, Inc. (“Spectrum”), contracts with federal agencies to take temporary custody of federal prisoners and Immigration and Customs Enforcement (“ICE”) detainees to transport them offsite for medical treatment or other appointments.  All Spectrum employees are at-will, on-call, hourly, and nonexempt.

Spectrum's company policy requires paid, on-duty meal periods.  Prior to October 1, 2007, Spectrum had in effect two employee manuals, both of which provided, in writing, that the job does not allow for breaks, other than using the hallway bathroom for a few minutes.  Neither employee manual contained a statement that employees could revoke the on-duty meal period policy agreement in writing at any time.

After the lawsuit was filed, Spectrum issued Memorandum 33 (“Memo 33”), which took effect on October 1, 2007.  Memo 33 provided that meal and rest breaks must be taken but both were on-duty breaks.  A statement that employees agree to the on-duty meal period policy and that such agreement could be revoked at any time in writing appeared above the employee signature line. 

The plaintiff, Gustavo Naranjo, began working for Spectrum in December 2006.  He was terminated in May 2007 when he left his post for a meal break.  He filed the lawsuit as a putative class action, alleging Spectrum did not provide meal and rest breaks in violation of Labor Code section 226.7 and Industrial Wage Commission(“IWC”) Wage Order No. 4-2001.  Naranjo sought premium pay under section 226.7, as well as waiting time penalties under section 203 and itemized wage statement penalties under section 226.

Trial Court's Rulings

The trial court certified a class of “non-exempt detention officers and security employees employed by Spectrum in California during the Class Period of June 4, 2004 to present” as to meal period violations under section 226.7, waiting time penalties under section 203, and penalties under section 226 for noncompliant itemized wage statements.  The trial court, however, declined to certify a class with respect to rest break violations under section 226.7, finding that common questions of fact did not exist based on evidence that Spectrum provided off-duty rest breaks to some employees.

The parties stipulated to try the lawsuit in separate phases.  The meal period class was divided into two subclasses.  The “pre-Memorandum 33” class included individuals who worked for Spectrum through September 30, 2007.  The “Memorandum 33” class included individuals who signed Memo 33.

The trial court granted a directed verdict in favor of the pre-Memorandum 33 class.  The court found that Spectrum did not comply with the wage order requirements because no written agreement existed wherein employees agreed to on-duty meal periods and were advised they could revoke the agreement at any time in writing.  The parties stipulated that the pre-Memorandum 33 class was owed premium pay.  The jury found in favor of Spectrum as to the Memorandum 33 class.

A bench trial was held to determine whether the pre-Memorandum 33 class was entitled to penalties under sections 203 and 226 of the Labor Code.  Based on Murphy v. Kenneth Cole Productions, Inc. where the California Supreme Court held that premium pay was a wage and not a penalty for purposes of the statute of limitations, the trial court found that premium pay was not reflected in the employees' paychecks.  The court further found that the failure to include premium pay in the employees' paychecks was knowing and intentional and therefore the pre-Memorandum 33 class was entitled to itemized wage statement penalties under section 226.  According to the court, however, Spectrum's failure to include premium pay in the paychecks of employees who separated from the company was not willful.  Thus, the pre-Memorandum 33 class was not entitled to waiting time penalties under section 203.

Finally, the trial court awarded prejudgment and post judgment interest at a rate of 10%.  Class counsel was also awarded attorneys' fees pursuant to section 226, subsection (e).

Both parties appealed.  Spectrum challenged its liability for premium wages and section 226 penalties to the pre-Memorandum 33 class.  Spectrum also challenged the amount of stipulated premium wages it owed to the pre-Memorandum 33 class, as well as the award of prejudgment interest and attorneys' fees pursuant to section 226, subsection (e).  The pre-Memorandum 33 class challenged the denial of section 203 waiting time penalties and apportionment and reduction of attorneys' fees.  Finally, Naranjo sought review of the trial court's denial of class certification for the rest break claim.  

Court of Appeal's Analysis

Pursuant to section 226.7 of the Labor Code, an employer must provide employees with a meal or rest period.  Wage Order 4 provides that employees must be relieved of all duties during a meal or rest break.  Otherwise, the break is considered “on-duty” and counts as time worked.  An on-duty meal period is allowed only when “the nature of the work prevents an employee from being relieved of all duty and when by written agreement between the parties an on-the-job paid meal period is agreed to.  The written agreement shall state that the employee may, in writing, revoke the agreement at any time.” Employers who fail to provide a compliant meal or rest period must pay employees their regular wage for the on-duty meal period and must also pay one hour of premium pay for every workday the meal or rest break policy was noncompliant.

Spectrum argued that it substantially complied with the requirements of Wage Order 4.  According to Spectrum, Wage Order 4 does not require that the agreement be contained within a single document.  Spectrum argued that a collection of documents, in conjunction with the parties' course of dealing, sufficed to show that employees understood and agreed to on-duty meal periods and also knew they could revoke the agreement by declining an assignment, requesting another shift or other accommodations, or quitting.  The court rejected Spectrum's argument, finding that Spectrum's on-duty meal period policy failed to comply with Wage Order 4's “unambiguous” requirement that employees sign a written agreement agreeing to an on-duty meal period and that such agreement contain a right to revoke clause.  The court reasoned that Spectrum's on-duty meal period policy failed because there was no written agreement with a right to revoke clause, not because the policy was not contained within a single document.  According to the court, accepting Spectrum's position would “shatter the ‘exceedingly narrow' exception for on-duty meal periods and fundamentally alter the conditions for legally compliant on-duty meal periods.”  The court therefore affirmed Spectrum's liability to the pre-Memorandum class for premium pay.

Having determined Spectrum's liability for premium pay, the court addressed the issue of whether the pre-Memorandum class was entitled to penalties under sections 203 and 226.  Section 203 imposes a “waiting time” penalty on an employer who willfully fails to timely pay wages to an employee who is discharged or voluntarily separates from the employer.  An action under section 203 is derivative of an employee's right to recover wages.

The court found that the pre-Memorandum 33 class was not entitled to waiting time penalties under section 203 because an action under section 226.7 to recover premium pay is not an action for wages.  Labor Code section 200 defines “wages,” in part, as “all amounts for labor performed by employees.”  The court found that while premium pay under section 226.7 is considered a wage for purposes of the statute of limitations, payment of premium pay is the remedy for an employer's failure to provide compliant meal or rest periods.  In other words, an employer violates section 226.7 by failing to provide compliant meal breaks, not by failing to pay “wages.”  Thus, the court affirmed denial of waiting time penalties to the pre-Memorandum class.

Like section 203, an action under section 226 for itemized wage statement penalties is derivative of an employee's right to recover wages.  Section 226 imposes a penalty on an employer who fails to provide an itemized wage statement with accurate gross and net “wages earned.”  Because premium pay is a statutory remedy for failure to provide compliant meal or rest periods, not an amount earned for work performed by the employee, the court found that the pre-Memorandum 33 class was not entitled to penalties under section 226.  The court therefore reversed the award of itemized wage statement penalties and attorneys' fees under section 226, subsection (e).

Finally, the court reversed the trial court's denial of class certification with respect to the rest break claim.  The court found that the issue of whether individual employees actually took off-duty rest breaks, notwithstanding Spectrum's policy of not providing off-duty rest breaks, relates to individual damages.  According to the court, the fact that individuals may have different damages is not reason to deny class certification.  Naranjo's theory of liability—Spectrum's policy of requiring on-duty rest breaks violated the law—invokes common questions of law and fact and is therefore well-suited for class treatment.

Significance of the Court's Decision

As the court noted, foreclosing the possibility of penalties and attorneys' fees disincentivizes attorneys from pursuing wage and hour claims where the potential payoff is less and deters employees from pursuing costly litigation where much of their recovery will be diverted to pay for legal representation.  While this decision is good news for employers for now, the California Supreme Court has yet to address the issue.  We will continue to monitor the issue.