Alleged wage statement violations are a staple of complaints in class action litigation and claims under the Private Attorneys General Act (PAGA). Labor Code section 226 requires that a wage statement accurately state nine categories of information, including among other things the gross wages earned, total hours worked, and net wages earned. An employer who “knowingly and intentionally” fails to comply with these requirements is subject to a penalty of up to $4,000. The employer and any officer, agent, or employee who “knowingly and intentionally participates or aids in the violation” of section 226 is also deemed guilty of a misdemeanor and faces fines of up to $1,000, and imprisonment for up to one year. Thus, this question of what constitutes a “knowing and intentional” violation of the pay stub requirements under section 226 is an important one, not only for the company, but also for the officers and employees making payroll decisions.
Labor Code Section 226
The failure to issue wage statements or issue wage statements which do not contain the required information can be a stand-alone claim under section 226. However, in practice, class action and PAGA complaints have sought penalties under section 226 as a derivative of other alleged wage and hour violations, such as unpaid wages for off-the-clock work, incorrect overtime rates, and missed meal and rest period premiums. Regardless of the employer’s good faith belief it complied with wage statement requirements, if wages were found to be owing based upon these other wage-and-hour violations, it was treated as automatically establishing that the wage statements were inaccurate, entitling the plaintiff to an award of penalties under section 226.
Previously, this was treated as a “knowing and intentional” violation on the basis that the employer “knew” the content of and “intended” to issue the wage statement. Using 20/20 hindsight when a wage statement was found deficient, the employer’s original good faith belief it was accurate when issued was treated as irrelevant and penalties were deemed to be owed.
This scenario, which plays out time and time again in class action and PAGA litigation came to a head in Naranjo v. Spectrum Services, Inc., California Supreme Court Case No. S279397 (May 6, 2024). In Naranjo, the plaintiff alleged his employer’s meal break policy violated the law entitling him to missed meal break penalties, and the employer was consequently in violation of section 226 for failing to include the required penalty in his reported wages, rendering his wage statements inaccurate.
Knowing and Intentional Standard of Section 226
The Supreme Court agreed that the “knowing and intentional” standard of section 226 requires that the employer know its conduct is in violation of the law or recklessly disregards the law. The Supreme Court concluded that an employer’s objectively reasonable, good faith belief that it has provided employees with adequate wage statements precludes an award of penalties under section 226, subdivision (e)(1). An employer that believes reasonably and in good faith, albeit mistakenly, that it has complied with wage statement requirements does not fail to comply with those requirements knowingly and intentionally.
Whether an employer is acting in good faith will depend upon various factors, including whether the employer has adopted policies, procedures, and practices regarding the issuance of accurate wage statements, and its positions are legally and factually reasonable, even if a court may later disagree. In contrast, evidence that an employer acted in bad faith, and knowingly and intentionally omitted pay from wage statements, or engaged in willful blindness regarding the law and failed to take reasonable steps to comply, may preclude assertion of a good faith defense.
Review Wage Statements
As claims under section 226 are an integral part of class action and PAGA litigation, it is important that employers periodically review not only their wage statements, but their policies and practices that can give rise to derivative section 226 claims. Some employers have been disappointed to learn that after approving wage statement templates, software configuration errors have resulted in the issuance of wage statements missing required information. It is recommended that employers periodically review their policies and practices regarding accurate timekeeping, prohibition of off-the-clock work, and meal and rest periods, and review samples of wage statements to confirm all required information is included. Documentation of these efforts to comply with the law may prove essential to establishing your good faith defense, and the plaintiffs’ lack of entitlement to penalties.
