Keeping the Faith: Employer's Good Faith Belief Prevails (2024)

In a rare victory for employers, the California Supreme Court unanimously held in Naranjo v. Spectrum Sec. Serv., Inc., S279397 (Decided 6 May2024) that an employer’s “objectively reasonable, good faith belief” that it has provided employees with compliant wage statements precludes an award of penalties under section 226(e)(1).

Gustavo Naranjo v. Spectrum Sec. Serv., Inc.

Fifteen years have passed since Gustavo Naranjo filed a putative class action against his former employer Spectrum Security Services, alleging meal period violations, seeking meal period premium wages, and seeking derivative claims for waiting time penalties under Labor Code section 203 and wage statement penalties under Labor Code section 226. In 2022, Naranjo asked the court to clarify whether the premium pay for meal and rest breaks constitutes “wages” rather than penalties. (Naranjo v. Spectrum Sec. Serv., Inc. 13 Cal.5th 93 (2022).) The court held that missed-break premium pay is “wages” subject to the timely payment and reporting requirements under the Labor Code and can support both section 203 waiting time penalties and section 226 wage statement penalties. Our full analysis of that decision can be accessed here.

The Law

Labor Code section 226(a) requires employers to provide employees with written, accurate itemized wage statement that lists certain enumerated categories related to their pay, including gross wages earned, total hours worked, and deductions, among others. Section 226(e)(1) provides employees who suffer injury because of the employer’s “knowing and intentional” failure to comply with section 226(a) the ability to recover the greater of statutory penalties of US$50-US$100 per violation (up to US$4,000) or actual damages, plus attorney’s fees and costs.

The California Supreme Court’s Decision

Following the 2022 Naranjo decision, the case was remanded to determine whether Spectrum was liable for penalties under Labor Code section 226(e)(1) for knowing and intentional failure to comply with the wage statement statute. The trial court answered in the affirmative, and Spectrum appealed. The question before the court this time was whether an employer has knowingly and intentionally failed to comply with section 226’s requirements when the employer had a good faith, yet erroneous, belief that it was in compliance.

The court conducted a careful review of the construction of the penalty provision in section 226. First, the court noted that the “knowing and intentional” language does not appear in the liability provision, but in the penalty provision. This indicates that liability does not require a particular mental state since an employer who issues incomplete wage statements is clearly not complying with the statute. However, penalties under section 226(e)(1) require scienter and “only come into play when the employer knowingly and intentionally fails to comply” with the statute. (Slip op. at 19.) The court declined to deviate from the general rule that courts “refuse to impose civilpenalties against those parties who acted in good faith and belief in the legality of their actions.” (Id. at 17.)

Second, the court considered the relationship between section 226 and the other provisions of the Labor Code, including section 203, which penalizes employers for late wage payments based on a heightened “willful” mental state requirement. An employer’s good faith dispute that any wages are owed will preclude an imposition of waiting time penalties under section 203. (Cal. Code Regs., tit. 8, § 13520.) The court observed that section 203 may trigger penalties for the willful failure to pay, but section 226(e)(1) penalties may be incurred for the knowing and intentional failure to comply with the statute. (Slip Op. at 26.) The wording of section 226’s penalty provision reaffirmed the court’s position that the Labor Code considers an employer’s good faith defense to penalties for nonpayment and nonreporting alike.

The court was not persuaded by Naranjo’s objection that permitting an employer to raise a defense based on good faith belief that it was complying with the statute ran counter to the established legal maxim that “ignorance of the law is no excuse.” The court disagreed with Naranjo, stating that the maxim makes exceptions, including for unwitting violations. (Id. at 29.) The court was also not persuaded by Naranjo’s concerns that excusing employers from section 226 penalties based on a good faith mistake of law would excuse and even incentivize ignorance of the law. On the contrary, the court said that lower courts are already tasked with evaluating an employer’s good faith when determining waiting time penalties under section 203. In those instances, the courts have focused on whether the employer’s basis for disputing the liability was “objectively reasonable.” As such, courts are already equipped to “evaluate an employer’s misunderstanding of legal requirements against a standard of objective reasonableness.” (Id. at 38.)

Finally, the court gave great credence to the fact that section 226’s legal requirements were uncertain and unsettled, evidenced by Naranjo’s 15-year litigation span. Constant throughout Naranjo’s litigation was Spectrum’s reasonable, good faith belief that it was complying with the law, even if it was a mistaken belief. Given the legal uncertainties, the court held that Spectrum’s failure to include the unpaid meal premiums in employees’ wage statements was not “knowing and intentional” within the meaning of section 226(e)(1). The court’s holding strongly implies that the mere knowledge of predicate facts is insufficient to establish “knowing and intentional” violation.

What Naranjo Means for Employers

The Naranjo decision permits employers to raise objectively reasonable, good faith belief defenses to wage statement claims, which, even if unsuccessful, can defeat a claim for section 226 penalties. However, employers should be aware that courts will scrutinize those defenses and reject frivolous defenses.

We remind employers to conduct periodic audits of their wage and hour policies and practices, along with wage statements, to ensure compliance with California’s sometimes technical laws.

Keeping the Faith: Employer's Good Faith Belief Prevails (2024)


Keeping the Faith: Employer's Good Faith Belief Prevails? ›

The California Supreme Court held that employers are not subject to penalties that would otherwise accompany a “knowing and intentional” failure to follow wage statement law if the employer reasonably and in good faith believed that the paystubs contained complete and accurate information.

What is a breach of duty to act in good faith? ›

An employee breaches the implied duty of good faith towards his employer if he is aware of but remains silent about information which undermines his employer's business interests. The employee's failure to disclose the information to his employer would be a breach of the duty of good faith and could justify dismissal.

What does good faith mean in the workplace? ›

“Good faith” is defined as, having honest intentions or in compliance with standards of decency and honesty. SPB Rule 8.

What is the duty of good faith in termination? ›

The Duty To Exercise Good Faith When Terminating an Employee. While employers are entitled to terminate employees at any time, they must treat employees fairly when doing so. When terminating employees without cause, employers must provide reasonable notice or pay in lieu of notice.

Why is good faith important? ›

Acting in good faith means you will be honest in upholding your end of the contract and not stand in the way of the success of the other party in performing their end of the contract or from reaping the benefits of the agreed-upon contract.

How do you prove breach of good faith? ›

Typically, courts find that a party breaches this rule when they act in ways that obviously undermine the benefits to the other party from the contract or if one party attempts to sabotage another in performing their end of the agreement.

What happens if you fail to comply with the duty of good faith? ›

A violation of the duty of good faith may include an intentional neglect of the usual duties of a director or officer, intentionally acting for a purpose other than the benefit of the corporation, or intentionally violating the law.

Is a good faith agreement legally binding? ›

It is generally accepted that parties may by contract bind themselves to negotiate in good faith. But there remain practical difficulties with this concept. Significantly, the courts have held that any express obligation to negotiate in good faith needs to be sufficiently specific as to the elements of the obligation.

What is the law of bad faith negotiation? ›

Bad faith refers to dishonesty or fraud in a transaction. Depending on the exact setting, bad faith may mean a dishonest belief or purpose, untrustworthy performance of duties, neglect of fair dealing standards, or a fraudulent intent.

What is an example of in good faith? ›

The report was made in good faith. These estimates, like any others, can be challenged but they were made in good faith. This was done in good faith and not as a deliberate act. We bought these tickets in good faith.

What is an example of bad faith conduct? ›

Examples of bad faith conduct include the employer making declarations that result in an attack on the employee's reputation, misrepresenting the employee's reason for leaving, or terminating the employee to deny them a right such as a pension benefit.

Is there no duty to negotiate in good faith? ›

There is currently no general duty to bargain in good faith, however there are exceptions where the duty may arise.

What is the good faith principle? ›

The principle of good faith enables a court to find unusual misconduct in performance to be a breach of contract without having to pretend to justify the decision by reference to intent or to custom.

What is another term for "in good faith"? ›

in good faith (adverb as in sincerely) Strongest matches. candidly deeply earnestly genuinely naturally profoundly really truly truthfully wholeheartedly.

What is a good faith effort strategy? ›

Defined, good faith efforts can be described as goal-setting efforts to eradicate and prevent discrimination in the hiring process. One way of accomplishing this is through outreach.

What is an example of a breach of faith? ›

a violation of good faith, confidence, or trust; betrayal: To abandon your friends now would be a breach of faith.

What is an example of a breach of good faith and fair dealing? ›

Behaviors that courts have held violate good faith and fair dealing include:
  • making harassing demands for assurances of performance.
  • rejecting the other party's performance for unstated reasons.
  • abusing discretionary power.
  • intentionally failing to mitigate damages.
Jun 21, 2022


Top Articles
Latest Posts
Article information

Author: Clemencia Bogisich Ret

Last Updated:

Views: 5865

Rating: 5 / 5 (80 voted)

Reviews: 95% of readers found this page helpful

Author information

Name: Clemencia Bogisich Ret

Birthday: 2001-07-17

Address: Suite 794 53887 Geri Spring, West Cristentown, KY 54855

Phone: +5934435460663

Job: Central Hospitality Director

Hobby: Yoga, Electronics, Rafting, Lockpicking, Inline skating, Puzzles, scrapbook

Introduction: My name is Clemencia Bogisich Ret, I am a super, outstanding, graceful, friendly, vast, comfortable, agreeable person who loves writing and wants to share my knowledge and understanding with you.