California law has long held that an employer’s good faith dispute over wages owed, if any, to its employees will preclude the imposition of “waiting time” penalties otherwise due following the termination of their employment.  This year, employers received a rare, gift-wrapped ruling that expanded this maxim.

In Naranjo v. Spectrum Security Services, Inc., the California Supreme Court resolved a split in judicial opinion regarding whether a similar good faith belief could negate penalties under Labor Code section 226 for knowingly and intentionally failing to report unpaid wages on wage statements.  The Court aligned with the Second District Court of Appeal's stance that if an employer had an “objectively reasonable” and sincere belief that they were issuing accurate wage statements, then they had not knowingly and intentionally violated wage statement laws.  Drawing from existing law, the Court concluded that such an employer could not be held liable for civil penalties related to wage statement violations.

The question for employers to answer going forward is, “what is an objectively reasonable, good faith belief?”  The Court opined that, as a rule, “where the law is clear and thus can easily be ascertained, knowledge of the law may be fairly imputed to an employer.”  Indeed, courts already evaluate an employer’s misunderstanding of legal requirements against a standard of objective reasonableness.  In contrast, the good faith defense standard is intended to spare those employers who face “genuine legal uncertainty and make mistakes of law that are reasonable and supported by evidence.”

In the case of Naranjo, the Court noted that the employer, Spectrum Security Services, Inc., had a reasonable, good faith basis for believing it was complying with California wage and hour law – as it had been setting new precedent and settling uncertainty over a host of existing laws over the 15 years that the case had been pending.  Moreover, the Court found that Spectrum had succeeded with its legal defenses more than once – even though the decisions in its favor would later be overturned on appeal.  And so, while Naranjo suggests a bright spot for employers in 2024, the reality remains that employers will have difficulty in establishing a “good faith belief” defense.  Either they must (1) break new ground by finding and challenging existing uncertainties in the law or otherwise (2) succeed, if at least partially, in demonstrating that a reasonable dispute over the amount of wages owed existed.  As such, on a practical level, this defense will likely be available only to the most dedicated employers.