News & Updates: Supreme Court Confirms – Meal and Rest Period “Premiums” are Wages for Purposes of Key Labor Code Provisions

Employers received more bad news recently from the California Supreme Court. In Naranjo v. Spectrum Security Services, the Court held that employers will face stiff penalties if they fail to report, on wage statements, premiums owed for missed meal periods or rest breaks, or fail to promptly pay those premiums upon separation of employment. Affirmatively catching any non-compliant breaks – and paying the requisite premium – is more important now than ever.

Summary

The key issue in the case was whether the one-hour premiums due for missed, short, or late meal periods or rest breaks constitute “wages”  – rather than penalties or fines – and must therefore be reflected on employee wage statements as required by Labor Code section 226 and timely paid to employees upon separation as required by California Labor Code section 203. The Court sided with the employees, holding that these premiums are wages. While the decision was unsurprising given the Court’s holding in Murphy v. Kenneth Cole Productions, Inc., 40 Cal. 4^th 1094 (2007), it serves as an important reminder to employers that failing to pay such premiums, even before there is a complaint, can have a cascading effect given these two additional – time sensitive – penalty provisions. Thus, it is critical to consistently and proactively evaluate meal and rest break policies, procedures for paying premium pay, and practices for issuing compliant wage statements and timely pay upon separation (including premium pay), to ensure compliance with California law. Failure to do so risks exposure to significant penalties and interest, including under California’s Private Attorneys General Act (PAGA).

The Decision

The plaintiff, Gustavo Naranjo, worked as a security officer for defendant Spectrum Security Services. Spectrum required all security officers to take on-duty meal periods, but did not have a valid written on-duty meal period agreement during a significant period of Naranjo’s employment, as required by California Labor Code section 512. Therefore, Naranjo was entitled to a premium of one hour of pay at the regular rate of pay for each day that he was not provided an uninterrupted 30-minute off-duty meal period by the end of his fifth hour of work. Spectrum, however, never paid its security officers the one hour of premium pay for missed, short, or late meal periods, as required by California Labor Code section 226.7.

Naranjo filed a class action on behalf of Spectrum security officers, alleging that Spectrum violated California’s Labor Code by failing to provide compliant meal periods and failing to pay premium pay for missed meal periods. Naranjo also alleged that Spectrum was liable for penalties for failing to include missed meal period premiums on wage statements as well as failing to include those premiums in final pay upon termination. Spectrum took the position that premium pay did not constitute wages, and therefore did not trigger the penalties provided for under Labor Code sections 203 and 226 for the late payment of final wages and wage statement violations.

The trial court found that the unpaid premiums were wages and awarded penalties and attorneys’ fees for inaccurate wage statements but did not award the 30-day waiting-time penalties for failure to timely pay wages upon termination under Labor Code section 203, finding the employer’s violation was not willful. Both parties appealed. The Court of Appeals sided with Spectrum, reasoning that premium pay is not wages, but a statutory remedy, and thus employees were not entitled to derivative penalties for failing to include the premium on wage statements or to pay them with final wages on separation.  Naranjo then appealed to the California Supreme Court. The Supreme Court reversed the appellate decision, holding that the premiums due for missed meal periods and rest breaks constitute wages under the Labor Code. Thus, the premiums must be reported on wage statements and must be timely paid to employees upon separation of employment with final pay.

The Court’s decision relied heavily on its prior opinion in Murphy v. Kenneth Cole Productions. In Murphy, the Court held that premium pay under Labor Code section 226.7 is a wage, rather than a penalty, for the purposes of determining the applicable statute of limitations. While there had been some conflicting opinions on whether this reasoning could be extended to other Labor Code requirements for wages, the Naranjo decision removed all doubt: premiums due for missed meal periods and rest breaks are wages, not penalties, for all purposes.

What The Decision Means for Employers

This decision serves as an important reminder to employers of their obligations regarding meal periods and rest breaks; and the importance of internal systems to provide one hour of premium pay at the regular rate of pay each time an employee is not timely provided a thirty-minute uninterrupted meal period or rest breaks that comply with state law. Failure to timely pay the premium creates exposure for the premium itself, along with penalties for each incorrect wage statement and up to thirty days of pay for late payment of final wages – and may result in PAGA penalties. Penalty upon penalty adds up quickly so timely compliance is key. While California’s wage-and-hour laws are complex, evaluating policies and procedures with a comprehensive checklist, in consultation with counsel, is a good place to start.