The plaintiff initiated a lawsuit claiming the employer violated California state labor laws regarding employee breaks. The plaintiff questioned such payment requirements (Ca. Lab. Code, § 203) and fines for “knowing and intentional” non-compliance with wage and hour reporting requirements (§ 226).

This long-running case in the California courts since 2022 involved the classification of premium pay for missed meals and rest breaks as wages, subjecting them to the required wage and hour statement reporting requirements. The court’s affirmation of this added complexity, supporting potential penalties, left unresolved whether failing to report these premiums was “knowing and intentional” under § 226(e).

The court’s thorough analysis of California Labor Code section 226’s two-tier remedial structure instills confidence in the legal system’s understanding of employers’ challenges. The court explained the first tier’s enforcement actions for compliance failures and the second tier’s penalties for ‘knowing and intentional’ failures, a topic courts have differed.

In a favorable outcome for employers, the court concluded that a reasonable, good-faith belief in compliance prevents penalties under § 226. The court ruled that the defense of wage and hour reporting these claims was not reserved for unintentional clerical errors, which provided a sense of vindication and justification for employers.

The court disagreed with appellate decisions that found a ‘knowing and intentional’ violation based solely on awareness of the factual basis of the breach, regardless of good-faith compliance belief. The court argued that penalizing employers acting in good faith would be illogical. This disagreement sets a precedent that future cases must consider, potentially changing the landscape of wage and hour reporting penalty claims.

Furthermore, the court harmonized § 226 with § 203, which imposes penalties for willful wage non-payment. The court noted that the legislative intent likely did not support penalties for documentation failures while excusing good-faith wage and hour reporting disputes. This harmonization provides a more transparent framework for employers to understand their obligations and potential defenses under these statutes.

Addressing concerns that this ruling might encourage ignorance of the law, the court emphasized that good faith misunderstandings are judged on objective reasonableness, reducing the risk of adverse incentives.

Applying this to the present case, the court ruled that employers acting with a reasonable, good-faith belief in compliance could not be penalized under § 226, especially since legal issues were unclear at the lawsuit’s inception.

Will New York Courts follow suit?

This ruling clarifies that employers in California can defend against wage and hour penalty claims by demonstrating a reasonable, good-faith belief in compliance. New York Courts may ultimately adopt a comparable standard.