United States: No Breaks For California Employers

On Monday, April 16, the California Supreme Court issued its eagerly-awaited decision in Murphy v. Kenneth Cole Productions, holding that the additional hour pay imposed under Labor Code § 226.7 for missed meal or rest breaks is a "wage" subject to a three-year statute of limitations.

In doing so, the court reversed a clear trend among the appellate courts in the state, where four of five decisions on the issue rejected the conclusion adopted by the Supreme Court. The decision raises the cost of noncompliance with the state's regulations mandating regular breaks throughout the workday, and will no doubt increase class wage-and-hour litigation in the state.

California's Break Laws

As early as 1916, the wage orders regulating working conditions of California employees mandated some form of regular breaks during the working day.

California regulates working conditions in part through substantive laws codified in its Labor Code, and in part through regulations issued by its Industrial Welfare Commission, called "wage orders." At present, there are 17 wage orders in effect, some regulating specific industries, other directed at types of occupations regardless of industry.

Today, the wage orders generally provide (with some exceptions) that employees are entitled to a half-hour unpaid meal break for every five hours of working time, plus a ten-minute paid break for every four hours (or major fraction over two hours) of working time.

No meal break is required if the workday is less than five hours, and no rest break is required if it is less than three and one-half hours. An employee may choose to skip a meal break only if his or her total workday is less than six hours; he or she may choose to skip a second meal break if the workday is less than twelve hours.

Thus, for a typical eight-hour workday, an employee is entitled to a mid-day lunch break and two rest breaks—one before lunch, the other after.

For 80 years, the break provisions of the wage orders were enforced through injunctive relief actions brought by the state's Division of Labor Standards Enforcement (DLSE).

But in revisions to the wage orders in 2000, provisions were added requiring employers to "pay the employee one hour of pay at the employee’s regular rate of compensation for each work day" in which a required break was not provided. At the same time, the legislature enacted a measure codifying this remedy at California Labor Code § 226.7, effective January 1, 2001.

Perhaps not coincidentally, the creation of a monetary remedy for noncompliance with break requirements coincided with the rise of class wage-and-hour litigation in the state.

The Wage-Penalty Debate

Meal and rest break claims soon became a major weapon in the arsenal of the plaintiffs bar. Litigants hotly debated the question of whether the monetary remedy for noncompliance was a "wage" or a "penalty." A number of issues were at stake in this debate:

First, what is the statute of limitations? If it is a penalty, than a one-year limitations period applies. (Cal. Civ. Proc. § 340(a).) If it is a wage, a three-year limitations period applies. (Cal. Civ. Proc. § 338(a).) Moreover, if it is a wage, then plaintiffs can arguably treat noncompliance as an unlawful business practice under California's Unfair Competition Law, and recover restitution (but not damages or penalties) going back four years. (See Cortez v. Purolator Air Filtration Products, 23 Cal.4th 163, 178-79 (2000) (four-year statute of limitations applicable to Unfair Competition Law prevails over three-year statute for recovery of unpaid wages, where unlawful business practice was a failure to pay overtime).)

Second, is there a private right of action? If the recovery for noncompliance is a penalty, there are arguable limitations on the right to litigants to sue for recovery. Labor Code § 226.7 does not provide for a private right of action. In fact, such language was amended out of the bill prior to enactment.

Labor Code § 218 permits a "wage claimant to sue...for any wages or penalties due him under this article," including § 226.7. To avail him- or herself of this right, the employee would have to assert a wage claim along with a penalty claim for noncompliance with break requirements. If he or she could not, the only other mechanism that would permit a private suit would be the Labor Code Private Attorneys General Act ("PAGA"). (Cal. Labor Code §§ 2699 et seq.)

PAGA, a qui tam statute, carries several limitations that make it unpalatable to a plaintiff, including administrative exhaustion requirements, a requirement that 75% of any recovery be turned over to the state, and provisions expressly giving the trial court the discretion to reduce a statutory penalty in the interests of justice.

Third, do other penalties or violations automatically follow from an employer's failure to comply with break requirements? Plaintiffs frequently allege, for instance, that former employees within a class alleging meal and rest break claims are entitled to "waiting-time" penalties under Labor Code § 203.

Section 203 provides, "as a penalty," that an employee's wages shall continue for up to 30 days following discharge "[i]f an employer willfully fails to pay, without abatement or reduction…any wages…." The theory is that ex-employees have not been paid all of the wages due following discharge because there is still pay owed to remedy breaks missed while the employee was employed.

Plaintiffs also frequently attempt to pyramid a violation of California's pay stub laws on top of an alleged break violation. Labor Code § 226 requires employers to issue along with paychecks a stub or statement that sets out, among other things, the employee's "gross" and "net wages."

If an employer commits "a knowing and intentional failure...to comply," the employee is entitled to sue for actual damages or a "penalty" of $100 for each "pay period in which a violation occurs" ($50 for the first pay period), up to $4,000. The employee can also recover attorneys’ fees. Since, these plaintiffs argue, the employer has failed to provide the additional wages owed for missed breaks, it necessarily follows that the employee's pay stub fails accurately to set forth his or her net (and gross) wages.

Plaintiffs won the first round of the debate in a 2005 federal district court decision holding that the monetary remedy was a wage. (Tomlinson v. Indymac Bank, 359 F. Supp. 2d 891 (C.D. Cal. 2005).)

But later in the year, employers convinced the DLSE to withdraw opinion letters concluding that the remedy was a wage, and instead issue proposed regulations and a higher-level "precedent decision" concluding that it was a penalty. (Hartwig v. Orchard Commercial Inc. (DLSE Precedent Dec. No. 2005-001, May 11, 2005).)

Subsequently, four out of five decisions from the state Court of Appeal unanimously held that it was a penalty, with the sole dissenting decision split 2-1 in favor of a wage. (Murphy v. Kenneth Cole Productions, 36 Cal. Rptr. 3d 418 (2006) (penalty); Mills v. Superior Ct., 38 Cal. Rptr. 3d 497 (2006) (penalty); Nat’l Steel & Shipbuilding v. Superior Ct., 38 Cal. Rptr. 3d 253 (2006) (wage); Banda v. Bagdasarian, 2006 WL 1554441 (penalty); Caliber Bodyworks Inc. v. Superior Ct., 134 Cal. App. 4th 365, 3808 n.16 (2005) (wage). Two district courts followed the majority of the state appellate courts, Corder v. Houston's Restaurants Inc., 2006 WL 855779 (C.D. Cal. Mar. 21, 2006); Pulido et al. v. Coca-Cola Enterprises Inc., 2006 WL 1699328 (C.D. Cal. May 26, 2006), but two more declined to rule until the California Supreme Court resolved the issue. West v. Circle K Stores Inc., 2006 WL 355214 (E.D. Cal. Feb. 14, 2006); Cornn v. UPS, 2006 WL 870969 (N.D. Cal. April 3, 2006).)

The Murphy Decision

In Murphy, the California Supreme Court summarily rejected the analyses of courts that came before it in favor of a simple textual analysis conducted under the shadow of an interpretive principle which requires that "statutes governing conditions of employment are to be construed broadly in favor of protecting employees." Slip Opn. at 6.

First, the court reasoned, the plain meaning of Labor Code § 226.7 "appears to indicate" that its monetary remedy is wages or "premium pay." The noun "pay," in its ordinary usage, is interchangeable with "wage," and other provisions of the Labor Code use the terms interchangeably. However, the court conceded that § 226.7’s language was also "reasonably susceptible" to the interpretation that the remedy was a penalty.

Second, the court turned to the legislative history of § 226.7. Noting that the original bill contained both a monetary remedy available to employees and a fixed penalty to be paid to the state, the court concluded that the former was more like premium pay for overtime or on-call time, and the latter more like a classic penalty provision. When the latter was removed from the bill, what remained was a wage obligation.

Third, the court rejected any "functional" analysis of the question, which focuses on whether the monetary recovery is proportional to injury, or extra-compensatory. For more than a century, California law has consistently adhered to the principle that a statutory recovery is a penalty for limitations purposes when "an individual is allowed to recover against a wrong-doer, as a satisfaction for the wrong or injury suffered, and without reference to the actual damages sustained...." (County of Los Angeles v. Ballerino, 99 Cal. 593, 596 (1893).)

The fact that a penalty is not called a "penalty" does not matter. (See, e.g., People v. Triplett, 48 Cal. 4th 233, 252 (1996) (fee for contract cancellation a penalty, since defendant was obliged to pay a plaintiff "other than what is necessary to compensate him for a legal damage"); County of San Diego v. Milotz, 46 Cal. 2d 761, 766 (1956) (reduction of court reporter's fees when transcript is not timely filed is a penalty).)

What does matter, for the purpose of this analysis, is that the monetary recovery provided in § 226.7 is disproportionate to the injury. If employees lose ten minutes of paid time off (the rest break), or the opportunity to go off the clock for thirty minutes (the meal break), they receive an hour of pay.

In the first place, the court held, the functional approach has no place in the analysis of § 226.7 because none of decisions in which it has been used "involve the construction of Labor Code provisions, which are to be interpreted broadly in favor of the employee." Slip Opn. at 18 n.13.

In the second place, it held that § 226.7 is proportional to injury, because it is designed to compensate for non-economic injuries as well as economic ones. In this respect, the monetary recovery is similar to premium pay for overtime, for time spent on "stand by" at the place of employment, or for split shifts.

Fourth, the court declined to give any deference to the views of the DLSE, the agency charged with enforcing the wage orders. Noting the agency’s "180-degree turn" in the wage-penalty debate after the issue became "politicized," it dismissed Hartwig in a footnote. See Slip Opn. at 9-10 n.7.

Now that a longer limitations period is available for meal and rest break claims, the plaintiff’s bar has added incentive to bring break period class actions and litigate the open issues left unresolved by the Murphy decision.

These include not only the questions implicated in the wage-penalty debate discussed above, but also additional questions concerning the state’s break requirements and the scope of premium pay required if employers fail to comply. For example:

• The wage orders provide for a separate recovery for meal and rest break violations. The DLSE interprets the wage orders as permitting one hour of pay per workday for missed meal breaks, and a second hour for missed rest breaks, regardless of the number of missed breaks in each category. Some plaintiffs have argued that the DLSE is wrong, and that employees are entitled to one hour of extra pay for each break missed. Some employers, on the other hand, argue that § 226.7 provides for only a single hour of pay per workday regardless of the type or number of missed breaks.
  
  PAGA establishes a ‘catch-all penalty’ applicable to "all provisions of [the Labor Code] except for those for which a civil penalty is specifically provided" of $200 "for each aggrieved employee per pay period" ($100 for the "initial violation"). (Cal. Labor Code § 2699(f).)

• Is this penalty recoverable in addition to the premium wage for meal or rest break violations?

One thing is certain: The costs of noncompliance with California’s regulation of workplace break policies are higher than ever. Employers doing business in California who have not already conducted a careful review of their policies to insure compliance should consult with experienced employment counsel.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.