This spring, California employers received two rare and substantial victories, alleviating some of the burden caused by frequent and costly wage and hour claims that plague California businesses. In 2023 alone, California's courts saw over 5,000 employment class actions filed, despite the state constituting only 12% of the U.S. population. To put this into perspective, between 2020 and 2022, 20,994 employment cases were filed in the 94 federal district courts across the United States, according to Lex Machina, an analytics division of LexisNexis. This disproportionate number of California cases can be attributed to favorable laws, plaintiff-friendly venues, and the availability of draconian statutory damages. These factors make California an appealing jurisdiction for such lawsuits. Against this backdrop, in two California cases, Naranjo v. Spectrum Security Services Inc. and Shah v. Skillz, employers found significant relief and success. These victories indicate that the tide of litigation may be shifting in employers' favor.
The Impact of Wage Statement Claims Minimized
Background
In Naranjo v. Spectrum Security Services Inc., the California Supreme Court handed a win to employers when it held that employers may use a good faith defense to defend against claims for penalties under California Labor Code Section 226, the statute governing wage statement requirements. The underlying dispute was a wage and hour class action filed by a former security guard, alleging meal and rest break violations. The lower court ruled in favor of the putative class members by holding that meal and rest breaks must be reported on official time sheets.
The narrow issue before the California Supreme Court was whether employees can recover civil penalties against their employers for "knowingly and intentionally" violating the California wage statement statute, even if they have a good faith belief that they are in compliance. The Court concluded employees may not recover statutory penalties for violations that are not knowing and intentional. In reaching this decision, the Court relied on the notion that civil penalties are designed to deter and punish rather than to compensate. A good faith defense negates that a wage statement violation was "knowing and intentional" as required by the statute.
Significance to Employers
Complying with California's complex wage statement requirements is no easy task. Adding to the risks for employers, claims for wage statement violations is a popular "add-on" cause of action to wage and hour litigations. This decision imposes a higher burden for plaintiffs seeking to recover penalties by requiring them to show that wage statement errors were done "knowingly and intentionally." This potentially opens the door for the employers to limit liabilities in cases where Plaintiffs claim they worked off the clock, but never reported the off-the-clock work, and the employers can show that they paid according to the time records. Employers may also consider requiring employees to sign off on their timecards to bolster its good faith defense.
Outside of the litigation context, employers should work with counsel to ensure they are properly issuing wage statements.
Stock Options Are Not Wages Under California Law
Background
In Shah v. Skillz, a California Court of Appeal held that stock options are not wages under the California Labor Code. In Shah, a startup terminated an employee who then brought claims of wrongful termination and retaliation. The startup had an IPO after the former employee's termination, and he was unable to exercise his stock options they were not available to him after his termination for cause. Disgruntled about the missed opportunity to benefit from the IPO, the former employee filed a lawsuit.
The former employee filed tort claims of retaliation and wrongful termination tort claims. These claims alleged that the company wrongfully terminated and retaliated against him for complaining about his stock options prior to termination. The former employee could only sustain those tort claims if they arose out of a protected activity, namely complaints about unpaid wages. Since the Court concluded stock options are not considered wages, the employee had no basis for those claims because he did not engage in protected activity. In reaching its decision, the Court relied on 9th Circuit decisions explaining that stock options are not amounts or money, but rather contractual rights to buy shares of stock.
Significance to Employers
This decision significantly limits the universe of wage claims that former employees can bring, particularly startup employees who are often granted stock options in lieu of higher salaries and other compensation. Since stock options are not wages, they cannot serve as the basis for an underlying wage and hour litigation. Further, employee complaints about stock options do not constitute protected activity, foreclosing another way employees may plead retaliation claims against employers. This decision also provides employers with arguments to limit damages even when the plaintiff prevails on other claims, such as wrongful termination.
Beyond litigation, employers should work with counsel to determine whether they should alter their compensation strategies and employment agreements in light of this decision.
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