As California employers know all too well, the state is notorious for its employee-friendly laws that can be difficult to navigate and create administrative and compliance headaches. Even the most diligent employers can find themselves on the wrong end of the law for minor, inadvertent errors, subjecting them to harsh and expensive penalties. For example, employer penalties under California Labor Code Section 226 – which requires employers to provide accurate, written itemized wage statements – can be substantial, and “knowing and intentional” violations can result in statutory penalties of up to $4,000 per employee or the employee’s actual damages, whichever is greater.

For years, there has been a split in authority among the California intermediate appellate courts as to whether a good faith defense applies to claims for penalties under this law. But on May 6, 2024, California employers finally received some good news when the California Supreme Court resolved the authority split in Naranjo v. Spectrum Security Services, Inc., unanimously concluding that an employer’s “objectively reasonable, good faith belief” that it has issued employees compliant wage statements precludes an award of penalties under Section 226(e)(1).

In Naranjo, an employee sued his employer alleging meal period violations, as well as derivative claims for penalties for failure to pay all wages due at termination and failure to provide accurate wage statements under Section 226(e). In its defense, the employer argued that its inadvertent noncompliance with the wage statement law was based on a good faith belief that it had complied with the law, and thus its noncompliance was not “knowing and intentional” as contemplated in Section 226(e)(1). After nearly 15 years and two appeals to the California Supreme Court, the issue was finally resolved in the employer’s favor. 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. In so holding, the court rejected the argument that a good faith defense would incentivize employers’ ignorance of the law, explaining that, because of the objective nature of the test, the good faith defense “does not ‘reward ignorance of the law’; it only means that penalties will be imposed on ‘employers who lack a good excuse while employers who face genuine legal uncertainty and make mistakes of law that are reasonable and supported by evidence will be spared.’” 

Naranjo is a rare win for California employers and will insulate employers from liability for inadvertent mistakes. However, to defeat a wage statement claim based on the good faith defense, employers still must demonstrate they had a reasonable basis to believe their wage statements were legally compliant, and they should be prepared to cite evidence of an objectively reasonable mistake of law or uncertainty in the law in support of their good faith defense.