Breaking News – Premium Pay Constitutes Wages!

by Shauna N. Correia, Nikki Mahmoudi
The Labor & Employment Law Blog

We previously advised employers that the California Supreme Court agreed to review the Court of Appeal decision Gustavo Naranjo v Spectrum Security Services, Inc. (“Naranjo”), decided by the Second Appellate District in 2019. On May 23, 2022, the California Supreme Court issued its decision, which has significant and immediate impacts on California employers. The key takeaways are:

  • Employers MUST report premiums paid for missed meal and rest periods on itemized wage statements pursuant to Labor Code section 226, and
  • If employers fail to timely pay the premium payments for an employee who is unlawfully denied a compliant meal or rest period, and that is not rectified by the time of the employee’s final paycheck, the employer can be liable for waiting-time penalties of up to 30 days’ pay pursuant to Labor Code section 203.
  • When an employee is awarded unpaid premiums under Labor Code section 226.7, prejudgment interest awarded is calculated at seven percent per year, not ten percent per year.

Background

At issue in Naranjo are Labor Code sections 226, 226.7, and 201-203.

In short, Labor Code section 226.7 provides that, whenever a meal period or rest period is required to be taken (under applicable Wage Orders), but is denied by the employer, a “premium” of one hour’s pay is owed to the employee (one hour for each missed meal and one hour, total, per day for one or more missed rest breaks). (Labor Code §226.7) Labor Code section 226 requires that all wage statements accurately state the gross and net “wages” earned by an employee on an itemized wage statement for each pay period.  “Knowing and intentional” violations of section 226 can trigger penalties of $50 for the first violation and $100 for each subsequent violation, up to $4000 per employee.  And, under Labor Code section 203, employers who “willfully fail to pay” unpaid wages due to a departing employee must pay the employee’s unpaid wages as waiting-time penalties for up to 30 days.

In brief, Naranjo is a class action case involving allegedly unpaid meal and rest breaks. Gustavo Naranjo claimed that he and other non-exempt workers were denied compliant meal and rest periods, triggering payment of missed meal/rest break “premiums.”  He further alleged that the employer failed to pay a “premium” for the missed meal and rest periods.  Naranjo also alleged that Spectrum failed to report the premium pay on employee’s wage statements pursuant to Labor Code section 226.  Naranjo asserted that premium are “wages” and, since they were not paid to him and other similarly situated former employees upon their discharge or resignation, they are owed a waiting time penalty.

Naranjo also claimed entitlement to prejudgment interest at ten percent per annum under Labor Code section 218.7, but Spectrum alleged that the proper pre-judgment interest rate was seven percent.

The appellate court held that “premiums” are not wages and therefore an employer’s failure to pay the premiums did not alone violate Labor Code section 226 wage statement violations or Labor Code section 203 waiting time penalties. The CA Supreme Court reversed the appellate court’s holding.  However, the Supreme Court agreed with the court below that the proper pre-judgment interest rate was seven percent.

Court’s Analysis.

The Court explained that premiums are both a legal remedy and wages because an employee becomes entitled to premiums precisely because the employee was required to work when they should have been relieved of duty. Labor Code section 200(a) defines “wages” broadly to encompass “amounts for labor performed…of every description.” When an employee remains on duty during lunch or works without relief, they are providing the employer services. The Court explained that, while it is true that premium pay is payable as a lump sum regardless of duration, premium pay is not unique in this respect and that the manner in which the pay accrues is not itself determinative on whether the pay is designed to compensate for labor. It also does not matter that premiums aim to remedy a legal violation because it “does not change the fact that the premium pay also compensates for labor performed under conditions of hardship.”

The Court pointed out that Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094 (“Murphy”), another California Supreme Court decision, concluded the Legislature intended for premiums to be understood as a “wage to compensate employees for the work” they performed during a meal or rest period and that Murphy’s interpretation of the Labor Code also makes sense in this context. As the Legislature requires employers to pay premiums on an ongoing, running basis, just like other forms of wages, “any unpaid premium pay must be paid promptly once an employee leaves the job.” An employer’s willful failure to comply with such an obligation, and be subject to penalties, serves Labor Code section 203’s purpose: “to incentivize employers to pay end-of-employment compensation when it is due, rather than forcing employees to seek administrative relief or to go to court.” (McLean v. State of California (2016) 1 Cal.5th 615, 626; Pineda v. Bank of America, N.A. (2010) 50 Cal.4th 1389, 1400; Smith v. Superior Court (2006) 39 Cal.4th 77, 82.)

Therefore, premium pay constitutes wages subject to Labor Code sections 226 and 203.

Impact.

This decision tacks on two potential and costly penalties for violations of Section 226.7.

Employers must vigilantly enforce compliant meal and rest breaks and ensure that when employees are denied meal or rest breaks (other than meals/rest breaks skipped by employee choice or a valid on-duty meal period agreement or valid waiver), proper premiums are paid.  Employers should consider requiring employees and supervisors to review and confirm the accuracy of all timesheets before submittal, including verification of whether or not the employee had the opportunity to take compliant meal and rest breaks for the pay period.  If they did not have this opportunity and there was no valid waiver or on-duty agreement, employers must pay the premiums owed.

Finally, employers should double check with payroll administrators and third-party payroll processors to find out (a) whether their system flags for review or automatically generates premiums for missed meals/rest breaks; and (b) confirm that wage statements reflect any premiums paid for the pay period.

If you have any questions, please do not hesitate to contact your Weintraub Tobin employment attorney.