In its latest decision on meal and rest period issues, the California Supreme Court unanimously held that premium pay owed employees for meal and rest break violations can be a basis for imposing waiting time and wage statement penalties on employers. The decision in Naranjo v. Spectrum Security Services, Inc. resolves confusion on the issue, after the Supreme Court’s s earlier decision holding such amounts are not “wages” – at least for purposes of awarding attorney’s fees to a prevailing party.  

In addition, on a point with broader implications, the Supreme Court held that wage statements must include all wages earned, and not just wages paid, with any wages earned but unpaid possibly triggering penalties for an inaccurate wage statement. Further, the Supreme Court determined the rate of prejudgment interest on awards of premium pay.

When Is Premium Pay “Wages”?

Labor Code section 226.7(c), first effective in 2001, requires employers to pay employees “one additional hour of pay at the employee’s regular rate of compensation for each workday that the meal or rest or recovery period is not provided.” The term “regular rate of compensation” generated considerable confusion and argument, leading to several California Supreme Court decisions.

First, the Supreme Court held that this premium pay is “wages,” and not a penalty, for statute of limitations purposes. Murphy v. Kenneth Cole Productions, Inc., 40 Cal.4th 1094 (2007). As a result, the limitations period could be either three or four years, depending on the legal claim, instead of one year.  

Later, the Supreme Court held that the amounts are not “wages” for purposes of awarding attorney’s fees and costs to a prevailing party. Kirby v. Immoos Fire Protection, Inc., 53 Cal.4th 1244 (2012). Labor Code section 218.5(a) provides that, “[i]n any action brought for the nonpayment of wages,” the court “shall award reasonable attorney’s fees and costs to the prevailing party.” Despite its holding in Murphy, the Supreme Court held that a claim based on Labor Code section 226.7(c) did not qualify, so a prevailing employee or employer could not recover fees and costs on a claim for premium pay. Why? The Court explained: “Section 226.7 is not aimed at protecting or providing employees’ wages. Instead, the statute is primarily concerned with ensuring the health and welfare of employees by requiring that employers provide meal and rest periods as mandated by [law].” It concluded that “a section 226.7 action is brought for the nonprovision of meal and rest periods, not for the ‘nonpayment of wages.’” (Emphasis in original.)

This language in Kirby led to confusion, and, finally, the Naranjo decision. It raised arguments over whether meal and rest period premium pay could serve as a basis for imposing waiting time or wage statement penalties. The lower court in Naranjo, along with other California courts and federal courts, held after Kirby that an employee owed meal or rest period premium pay could not recover those penalties for the failure to pay premium pay as required. The reason was that, under Kirby, those courts ruled that premium pay was not “wages,” so a violation could not result in waiting time or wage statement penalties.

For Waiting Time or Wage Statement Penalties, It’s “Wages” After All

Waiting time and wage statement penalties require a violation involving “wages.” Labor Code section 203(a) imposes waiting time penalties of up to 30 days’ wages for an employer’s failure to timely pay “any wages” upon the end of employment. Labor Code section 226 requires issuance of an accurate wage payment statement for “each payment of wages,” with penalties up to $4,000 per employee for failure to do so. The penalties are not automatic, though. Labor Code section 203 requires a “willful” violation for waiting time penalties, while Labor Code section 226(e) requires an employee suffer injury from a “knowing and intentional failure” to comply with wage statement provisions.

In Naranjo, the Supreme Court clarified that the meal and rest break premiums constitute “wages” for these purposes. It held that “[a]lthough the extra pay is designed to compensate for the unlawful deprivation of a guaranteed break, it also compensates for the work the employee performed during the break period. The extra pay thus constitutes wages subject to the same timing and reporting rules as other forms of compensation for work.”

The Supreme Court held that premium pay under Labor Code section 226.7(c) serves both as a legal remedy, or sanction, for not providing a break as required, as well as “wages.” It reasoned that an employee “becomes entitled to premium pay for missed or noncompliant meal and rest breaks precisely because she was required to work when she should have been relieved of duty.” Thus, “Section 226.7 reflects a determination that works in such circumstances is worth more — or should cost the employer more — than other work, and so requires payment of a premium.”  

Naranjo avoided discussing Kirby until nearly halfway through the decision. It acknowledged the fairly common reading of Kirby as holding that premium pay is not “wages,” except for statute of limitations purposes – with “[v]ariations on this theme” appearing in “the opinions of a number of courts that have likewise read Kirby to mean that missed-break premium pay is not generally a wage.”  Naranjo responded that these arguments “misread Kirby.” That decision “did not reject or limit Murphy’s characterization of section 226.7 premium pay as compensation for labor.”  

So how does Labor Code section 226.7 involve “wages,” if an action for unpaid premium pay is not an action for “the nonpayment of wages”? According to the Court, Kirby first involved a different inquiry. The rest of the explanation split hairs between the violation and the remedy to come to a different conclusion here. According to Naranjo, “the characterization of the nature of an action under section 218.5 turns instead on the nature of the underlying legal violation the action seeks to remedy, not the form of relief that might be available to cure that violation.” Hence, “to say that a section 226.7 remedy is a wage, as we did in Murphy, is not to say that the legal violation triggering the remedy is nonpayment of wages, as opposed to the deprivation of meal or rest breaks.” Rather than narrowing Murphy’s character of premium pay as “wages,” the Supreme Court now clarified that Kirby “merely held that the nature of the remedy does not dictate the proper characterization of the legal violation triggering the remedy under section 226.7.”

Concluding again here that meal and rest period premium constitutes “wages,” the Supreme Court thus held that an employer’s failure to pay premium pay as and when required could trigger waiting time and wage statement penalties.

Wage Statements Must Reflect Amounts Earned, Not Just Paid

In addition to holding that meal and rest period premium pay are “wages” for itemized wage statement purposes, the Naranjo decision further made clear that wage statements are inaccurate (and a violation) when an employer fails to include all wages earned – not just wages paid. The employer in Naranjo argued that it could not be liable for violating Labor Code section 226 by not including premium pay owed on employees’ wage statements because these amounts were not actually paid, but rather withheld. 

The Supreme Court rejected this reading of the law. Among its required information, Labor Code section 226(a) requires that wage statements include “gross wages earned” and “net wages earned.” The Court held that Labor Code section 226 “does not require employers to report only those amounts it deigns to pay.” Rather, an employer must list “all amounts earned and now owing, not just those amounts actually paid.” As a result, a wage statement “that conceals amounts earned, on the ground that they also were not paid, is not an accurate statement, and it does not comply with the statute.”

This holding is significant. It clarifies what wage payment statements require more generally, making clear that California employers potentially face wage statement penalties whenever there is an underpayment of any wages, and amounts earned are not included on an employee’s statement.

Lower Prejudgment Interest Rate Applies

Finally, in Naranjo, the Supreme Court determined that a seven percent prejudgment interest rate – as opposed to a 10 percent rate – applies to awards of meal and rest period premium pay. Again, in a sense, this issue also raised the question of whether it involved “wages,” but with the Court going the other way.

The Supreme Court recognized that a 10 percent prejudgment interest rate generally applies to any action for the “nonpayment of wages” under Labor Code section 218.6. The same rate also applies to contract claims under Civil Code section 3289(b). However, relying on Kirby here, the Court reasoned that an action for the nonpayment of premium pay under Labor Code section 226.7 is not an action for the “nonpayment of wages.” As such, an action to recover premium pay for meal and rest periods under Labor Code section 226.7 does not qualify for the 10 percent rate in Labor Code section 218.6. Instead, the Supreme Court concluded that the lower seven percent default interest rate authorized by the California Constitution applies. 

Takeaways for Employers

The Naranjo decision resolves the uncertainty that Kirby created, as well as the issues that the Court addressed. The decision further clarifies that meal and rest period premium pay constitutes “wages,” and resolves the important questions of whether such pay can be a basis for waiting time and wage statement penalties. Naranjo further underscores the need for California employers to comply with meal and rest period requirements, as potential liability extends beyond premium pay. This decision is another reminder for employers to review meal and rest period compliance, ensure that any required premium pay gets paid as and when required, and wage statement compliance. It also is a reminder to remain vigilant constantly on complying with meal and rest period and premium pay requirements.