The Supreme Court of California has just resolved a long-standing debate over whether employees may recover additional statutory penalties if employers do not include unpaid premium payments for meal period and rest break violations (commonly referred to as “break penalties”) on employee paystubs, or include such premium payments with an employee’s final wages due immediately on termination of employment. Finding that break premium payments are “wages,” and not penalties, the Supreme Court has ruled that employees may recover additional Labor Code penalties for the late payment of final wages or paystub violations if break premiums are not included on paystubs or in an employee’s final wages. These “penalties on penalties” can make noncompliance extremely costly for employers.

In Naranjo v. Spectrum Security Services, a putative class of security guards alleged meal break violations for on-duty, compensated meal periods under California Labor Code section 226.7, seeking to recover premium payments for allegedly deficient meal breaks, penalties for the late payment of the allegedly owed premium payments on termination of employment (pursuant to Labor Code Section 203), penalties for allegedly inaccurate wage statements that omitted the premium payments allegedly owed (pursuant to Labor Code section 226), and attorney’s fees.

The Court of Appeal held that unpaid premium wages for meal break violations do not entitle employees to additional waiting time penalties or penalties for inaccurate pay stubs (i.e., penalties on penalties) if their pay and pay statements during the course of the violations included the wages earned for on-duty meal breaks, but not the unpaid premium wages.

The issues on appeal to the Supreme Court of California:

• Does a violation of Labor Code section 226.7–requiring payment of premium wages for rest and meal period violations–give rise to waiting time or inaccurate pay stub penalties when the employer does not include the premium wages in the employee’s wage statements but does include the wages earned for meal breaks themselves? The Court of Appeal answered this question “no,” but the California Supreme Court reversed and held that employees may recover Section 226.7 penalties if premium wage payments are not listed on paystubs.
• Must premium payments for missed breaks be paid within the time limits for final wages proscribed by Labor Code section 203? The Supreme Court answered “yes,” opening the door for penalty claims on the late payment of premium payments on termination.
• What is the applicable prejudgment interest rate for unpaid premium wages owed under Labor Code section 226.7? The Court of Appeal said seven percent, and the California Supreme Court agreed.

What does this mean for employers?

Employers should immediately:

• Check that premium payments for missed breaks are being included on employee paystubs for the pay periods in which the premiums are owed;
• Ensure the final wages for any terminating employee includes any premium payments “earned” by the employee before the termination date; and
• Ensure that premium payments are being calculated and paid at the employee’s “regular rate of pay,” instead of their base hourly rate. (See our prior blog, here).

With the Supreme Court’s ruling in Naranjo, meal and rest break premiums are now “wages,” and an employer’s failure to pay premiums can bring about costly wage statement and waiting time penalty claims. Employers who have been diligent about paying meal and rest break premiums now must also be even more careful to avoid having to pay additional penalties to employees.