• California Supreme Court Refuses to Limit Meal and Rest Period Claims
  • May 3, 2007 | Authors: Alexandra A. Bodnar; Benjamin E. Goldman; Michael W. Kelly; Thomas T. Liu; Casey J.T. McCoy
  • Law Firms: Squire, Sanders & Dempsey L.L.P. - Los Angeles Office ; Squire, Sanders & Dempsey L.L.P. - San Francisco Office ; Squire, Sanders & Dempsey L.L.P. - Los Angeles Office
  • In a ruling that will affect hundreds of pending wage and hour actions with widespread ramifications for almost every employer in California, the California Supreme Court unanimously decided in Murphy v. Kenneth Cole Productions, S140308, that the "one additional hour of pay" in Labor Code section 226.7 is a wage and not a penalty. The Supreme Court's decision that the payments are a form of compensation means that employees will have as long as three years to file their meal and rest period claims and companies can be required to pay for three years' worth of violations (or possibly up to four years as discussed below). This Alert discusses the Murphy case and the implications for employers with employees in California.

    California's Meal and Rest Period Laws and the Wage-Penalty Debate

    Under regulations issued by the California Industrial Welfare Commission (IWC) called "wage orders" and the Labor Code, California employers must provide an unpaid 30-minute meal period to employees who work more than five hours in a day (subject to some exceptions) and "authorize and permit" a paid 10-minute rest period for every four hours worked or major fraction thereof. An employee who is required to work during those periods is entitled to "one additional hour of pay at the employee's regular rate of compensation for each work day that the meal or rest period is not provided." With limited exceptions, these laws apply to all employers, even those with only one employee.

    Since 2000, when lawmakers decided to award the one hour of pay for any meal and rest period violation, the applicable statute of limitations has been a hotly contested issue. The dispute rests on whether that premium payment is considered a wage under the Labor Code, which triggers a three-year statute of limitations instead of the one-year statute of limitations if the premium is considered a penalty.

    Appellate courts in the state have come to different conclusions, four of which held that the additional hour of pay under section 226.7 is a penalty, while one held that it is a wage. Even the Division of Labor Standards Enforcement (DLSE), the division empowered to enforce California's wage and hour laws, has taken contradictory positions. First, it indicated that the premium payment is a wage in various opinion letters. It later rescinded these opinion letters in 2004 and in 2005 issued proposed regulations and a "precedent decision" interpreting the remedy as a penalty. The DLSE rescinded the proposed regulations after it became clear that the Supreme Court would hear the issue. The highly anticipated April 16, 2007 decision in Murphy v. Kenneth Cole Productions appears to have finally resolved this dispute, unless or until the California legislature changes the law.

    The Murphy Decision

    In Murphy, the California Supreme Court unanimously rejected the conclusion of the majority of the state's appellate courts and the DLSE and concluded that the additional hour of pay provided by Labor Code section 226.7 is a wage subject to a three-year statute of limitations under Civil Procedure Code section 338. Guided by the interpretive principle that laws on working conditions must be "construed broadly in favor of protecting employees," the Court concluded that the language, purpose and administrative and legislative history of the additional pay provision convinced the Court that the provision was not a penalty.

    In particular, the Supreme Court turned to the legislative history of section 226.7 and noted that the original bill contained both a monetary remedy available to employees and a fixed penalty to be paid to the state. The Court likened the former to other compensation-related premiums, such as overtime, and the latter to a classic penalty provision. The Court concluded that after the latter was removed from the bill, only the wage obligation remained. The Court also concluded that, unlike a penalty, section 226.7 creates an "affirmative obligation" to pay an employee one hour of pay for missed meal and rest periods, meaning that the payment is "immediate" and does not require enforcement actions, similar to any other obligation to pay wages.

    Additionally, the Supreme Court rejected arguments that the additional hour of pay is more like a penalty than a wage because it is not proportional to a missed 30-minute meal period or two 10-minute rest breaks, or some combination thereof. In fact, the Court found that the premium pay was designed to compensate employees for non-economic injuries suffered from working through a meal or rest period. The Court also declined to give any deference to the views of the DLSE because of the agency's "180-degree-turn" in the wage-penalty debate after the issue became "politicized."

    The Broad Ramifications of Murphy's "Wage" Ruling

    The "wage" ruling in Murphy has three primary implications for employers: (1) employers can no longer limit meal and rest period claims to one year; (2) employers' exposure may be greater because of new derivative claims and penalties; and (3) employers may be required to pay pre-judgment interest on past-due section 226.7 payments.

    1. Murphy makes clear that the statute of limitations for section 226.7 claims is three years. Additionally, although it was not discussed in Murphy, claimants likely will seek to take advantage of the four-year statute of limitations available under Business and Professions Code section 17200. Claimants will argue that, unlike penalties, the recovery of unpaid wages under section 226.7 is a permissible form of restitution under section 17200. Because cases alleging meal and rest period violations are often brought as class actions, Murphy now expands the size of potential classes to include workers employed up to four years prior to the date the action is or was filed.

    2. In addition to derivative section 17200 claims, the Supreme Court's finding, albeit in dicta, that section 226.7 imposes an "affirmative obligation" to pay an additional hour for missed meal and rest periods confirms that even if an employer pays for time worked during a meal period, the failure to timely pay the premium would constitute a separate violation of the Labor Code for a failure to pay wages. (Presumably, the pay would be timely if included within the same payroll period as the missed meal period, but this issue is unclear.) This violation may subject the employer to additional penalties under other Labor Code statutes, such as sections 203 and 2689 et seq. (the Labor Code Private Attorneys General Act, or PAGA).

      Section 203 imposes "waiting time" penalties of one day's pay (up to 30 days) for every day that an employer willfully fails to pay a discharged employee all wages due. Because the Supreme Court has now classified meal and rest period payments as "wages," claimants will argue that they are entitled to waiting time penalties if they missed even one meal or rest period and their employer failed to make the additional one-hour wage payment at termination.

      Similarly, because section 226.7 provides compensation, not penalties, claimants also may argue that they are now entitled to PAGA penalties on top of the additional wage payment. PAGA establishes a catch-all penalty applicable to "all provisions of [the Labor Code] except those for which a civil penalty is specifically provided." The penalty is generally US$100 for an initial violation and US$200 for each subsequent violation for each aggrieved employee per pay period.

      These additional remedies clearly illustrate that the costs of noncompliance are higher than ever. Accordingly, California employers must be much more careful about ensuring that meal and rest periods are provided to non-exempt employees and recording meal periods. Additionally, employers should evaluate their payroll practices and make any necessary changes to automatically pay the one-hour premium to any non-exempt employee who fails to take meal or rest periods. Employers should make these payments within the pay period in which the break is missed and note such payments on the employee pay statement.

    3. Finally, as a general rule, the Labor Code and Civil Code provide for prejudgment interest on successful claims for unpaid wages. The Murphy holding that section 226.7 payments are wages creates a claim for prejudgment interest on any past-due payments.
    Conclusion

    The Murphy "wage" ruling eliminates one area of previous uncertainty. Section 226.7 payments are wages, not penalties. It does not, however, address the scope of an employer's duty to "provide" meal periods, an issue that also has stirred much debate. In a press release issued in response to Murphy, the California Department of Industrial Relations has stated that the Labor and Workforce Development Agency, along with the DLSE, "will continue to work with stakeholders regarding other outstanding meal and rest period issues." Squire Sanders labor and employment lawyers will continue to monitor any further developments in this area, which will be the subject of future client bulletins.