Under California Labor Code Section 226.7, if an employer fails to provide proper meal or rest breaks, they must compensate the affected employee with an extra hour of pay at their regular rate for each infraction. This additional payment is considered wages, not a penalty, and must be clearly noted on the employee's wage statement as per Section 226. In the recent California Supreme Court decision, Naranjo v. Spectrum Security Services, Inc. (2024), the Court confirmed that meal break premiums are considered reportable wages, but an employer's good faith belief in compliance can shield them from penalties for "knowing and intentional" violations under Section 226.

Gustavo Naranjo, a former employee of Spectrum Security Services, Inc., initiated a class action lawsuit claiming that Spectrum violated California's meal break regulations. Naranjo asserted that Spectrum failed to provide the legally mandated meal breaks and did not pay the required meal break premiums. The central issue was whether these unpaid meal break premiums should be considered "wages" that must be reported in wage statements. Additionally, the case examined whether Spectrum, which believed in good faith that it did not need to report these premiums, committed a "knowing and intentional" violation of Section 226 and should be subject to penalties.

In its defense, Spectrum claimed that any failures in compliance were due to a reasonable, good faith belief that they were following the law, even though this belief was later proven wrong. Specifically, Spectrum argued that ongoing legal uncertainties in California about how meal break premiums should be classified contributed to their decision-making.

After a series of appeals, the California Supreme Court held that meal break premiums are indeed wages and that employers must include these premiums in the final wages paid to employees upon termination or resignation and must report them in wage statements. However, the Court also held that the law had been previously unsettled regarding whether meal break premiums must be reported as wages on wage statements. Accordingly, Spectrum's good faith belief that it was complying with the law, despite being mistaken, shielded it from penalties.

The Court reasoned that a “knowing and intentional” violation requires more than just non-compliance due to misunderstanding or misinterpretation of the law; it involves a clear disregard for legal obligations. Thus, actions taken under a reasonable and good faith belief in their legality, even if incorrect, do not meet this threshold.

Ultimately, the Court's decision underscores that penalties under Section 226 are meant to punish willful neglect of the law rather than penalize employers for legitimate errors in interpreting complex legal requirements. Given the changing nature of California's employment landscape, employers are reminded to continually update their understanding of employment laws and seek expert legal advice to ensure they navigate these waters correctly and transparently, thereby minimizing the risk of litigation.