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Spectrum Security Services, Inc., provides secure custodial services to federal agencies. The company transports and guards prisoners and detainees who require outside medical attention or have other appointments outside custodial facilities.

Gustavo Naranjo was a guard for Spectrum. Naranjo was suspended and later fired after leaving his post to take a meal break, in violation of a Spectrum policy that required custodial employees to remain on duty during all meal breaks.

Naranjo filed a putative class action on behalf of Spectrum employees, alleging that Spectrum was required to report the premium pay on employees’ wage statements and timely provide the pay to employees upon their discharge or resignation, but had done neither. The complaint sought an additional hour of pay – commonly referred to as “premium pay” – for each day on which Spectrum failed to provide employees a legally compliant meal break.The complaint sought the damages and penalties prescribed by statutes as well as prejudgment interest.

After a remand from the Court of Appeal (Naranjo I v. Spectrum Security Services, Inc. (2009) 172 Cal.App.4th 654) on several issues, the trial court certified a class for the meal break and related timely payment and wage statement claims and then held a trial in stages. The trial court entered judgment for the plaintiff class on the meal break and wage statement claims and awarded attorney fees and prejudgment interest at a rate of 10 percent.

Both sides appealed. The Court of Appeal affirmed the trial court’s determination that Spectrum had violated the meal break laws but reversed the court’s holding that a failure to pay meal break premiums could support claims under the wage statement and timely payment statutes. It also ordered the rate of prejudgment interest reduced from 10 to 7 percent. (Naranjo II v. Spectrum Security Services, Inc. (2019) 40 Cal.App.5th 444).

The California Supreme Court disagreed with the Court of Appeal, decision in Naranjo II, and concluded that the extra pay constitutes wages subject to the same timing and reporting rules as other forms of compensation for work, but agreed that the 7 percent default rate set by the state Constitution applies. (See Cal. Const., art. XV, § 1.) in its opinion in Naranjo III v Spectrum Security Services Inc. (2022) 13 Cal.5th 93.

The Supreme Court then remanded the matter back to the Court of Appeal to resolve two issues the parties addressed in their respective appeals, but that it did not reach based on its conclusion about the nature of missed-break premium pay: (1) whether the trial court erred in finding Spectrum Security Services, Inc. (Spectrum) had not acted “willfully” in failing to timely pay employees premium pay (which barred recovery under § 203); and (2) whether Spectrum’s failure to report missed-break premium pay on wage statements was “knowing and intentional,” as is necessary for recovery under section 226. (Naranjo III v. Spectrum Security Services, Inc., supra, 13 Cal.5th at p. 126.)

The Court of Appeal noted that during the bench trial involving several of Spectrum’s affirmative defenses,.Spectrum argued state labor laws do not apply to the class members because they were working on federal enclaves and/or performing federal functions such that they should be treated as federal employees.

In the second phase of trial, the meal break class cause of action was tried to a jury. Naranjo did not dispute that Spectrum had always required on-duty meal periods as company policy because of the nature of its guards’ work but argued that Spectrum did not have a valid written on-duty meal break agreement with its employees. The jury found Spectrum not liable for the period beginning on October 1, 2007, after Spectrum had circulated and obtained written consent to its on-duty meal break policy.

After receiving supplemental briefing following remand, the Court of Appeal in its published opinion in Naranjo IV v Spectrum Security Services Inc. (2023) – B256232A, concluded that: (1) substantial evidence supports the trial court’s finding that Spectrum presented defenses at trial – in good faith – for its failure to pay meal premiums to departing employees and therefore, Spectrum’s failure to pay meal premiums was not “willful” under section 203; and (2) because an employer’s good faith belief that it is in compliance with section 226 precludes a finding of a knowing and intentional violation of that statute, the trial court erred by awarding penalties, and the associated attorneys’ fees, under section 226.

Although district courts in California are divided on the question, the majority view is that an employer’s good faith belief it is not violating the California Labor Code precludes a finding of a knowing and intentional violation. In this case the Court of Appeal agreed “with the weight of authority that a good faith dispute over whether an employer is in compliance with section 226 precludes a finding of a knowing and intentional violation.”

It was unpersuaded by the approach Naranjo advanced, and that a minority of federal district courts have adopted, which is that “knowing and intentional” is a “minimal standard” that may be satisfied by simply showing an employer provided an inadequate wage statement not as a result of clerical error or inadvertent mistake.