Apr 20, 2007 Wage & Hour Issues

California Supreme Court Expands Employer Liability for Missed Meal and Rest Periods

On April 16, 2007, the California Supreme Court ruled that payments mandated by California Labor Code § 226.7 for meal and rest period violations are “wages” and not “penalties.” The Court’s ruling that these payments constitute “wages” makes claims brought under section 226.7 subject to a three-year statute of limitations (rather than a one-year limitations period for “penalties”). The Supreme Court’s decision in Murphy v. Kenneth Cole Prod., 2007 WL 1111233 (Cal. April 16, 2007), settled a split in authority among the California Courts of Appeal. Compare Murphy v. Kenneth Cole Prod., 134 Cal. App. 4th 728 (2005); Mills v. Sup. Ct., 135 Cal. App. 4th 1547 (2007) (both holding that section 226.7 payments constitute penalties) with National Steel and Shipbuilding Co. v. Sup. Ct., 135 Cal. App. 4th 1072 (2006) (holding that section 226.7 payments are wages). In essence, the Murphy decision exposes employers to increased liability for meal and rest break period violations. 

Meal and Rest Period Requirements in California

California Labor Code § 226.7(b) requires non-exempt employees to be paid one hour’s pay at their regular rate for each workday on which they are not provided a meal or rest period under the requirements of the applicable Industrial Welfare Commission Wage Order. These Wage Orders generally require employers to provide a thirty-minute meal period to employees who work more than five hours in a day, and a second thirty-minute meal period to employees who work more than ten hours in a day. The Wage Orders also generally require employers to permit ten-minute rest periods during every four-hour work period for employees who work at least 3.5 hours in day.

The Lower Court Decisions in Murphy

Plaintiff John Paul Murphy worked as store manager for a Kenneth Cole retail store. Murphy was classified as exempt and regularly worked 9-to-10-hour days, received no overtime, and did not receive meal and rest periods. After he resigned, Murphy filed a complaint with the California Division of Labor Standards Enforcement (“DLSE”) alleging that he had been misclassified as exempt and seeking payment for accrued overtime plus interest and waiting-time penalties under the Labor Code. Murphy prevailed before the DLSE, and Kenneth Cole sought de novo judicial review of the administrative decision. In the Superior Court, Murphy asserted additional claims for missed meal and rest periods and itemized pay statement violations, to which Kenneth Cole objected. Overruling Kenneth Cole’s objections, the Superior Court awarded Murphy his entire claim for unpaid overtime, payments for missed meal and rest periods, penalties for failing to furnish itemized wage statements, waiting time penalties, and prejudgment interest. The Superior Court applied the three-year statute of limitations to Murphy’s meal and rest period claim, thus entitling him to payments for violations going back three years from the filing of his DLSE claim.

Kenneth Cole appealed, arguing that the Superior Court erred in addressing the claims for meal and rest break periods and itemized pay statement violations that had not been previously raised before the DLSE. Kenneth Cole also contended that the payments ordered for the meal and rest break period violations were penalties, and thus subject to only a one-year statute of limitations. The Court of Appeal agreed with Kenneth Cole, but Murphy appealed, and the California Supreme Court granted review on two issues: (1) whether section 226.7 payments are “penalties” or “wages”; and (2) whether a trial court may hear claims on review of a DLSE decision that were not part of the initial DLSE hearing.

The Supreme Court’s Decision

On the first issue, the Supreme Court concluded that the payments prescribed by section are “wages.” In making this determination, the Court relied heavily on the statutory language and noted, in particular, that the legislature did not use the word “penalty” in section 226.7. The Court also considered the statute’s legislative history, finding it significant that while an initial draft of the bill that became section 226.7 provided both for payments to employees and penalties to be paid to the Labor Commissioner, the penalties were removed by later amendments. The Court ultimately found that the “additional hour of pay” prescribed by section 226.7 is not a penalty (subject to a one year limitations period) but a premium wage intended to compensate employees (subject to a three-year limitations period).

On the second issue, the Supreme Court ruled that in a de novo appeal from a DLSE decision a trial court may consider and rule on wage claims that the employee never asserted in the DLSE hearing. The Court found that “[p]ermitting trial courts to exercise jurisdiction over the entire wage dispute, including related wage claims not raised in front of the Labor Commissioner, is consistent with trial courts’ broad discretion in adjudicating claims at trial.”

Murphy’s Impact on Wage-and-Hour Litigation in California

The Supreme Court’s decision that section 226.7 payments are “wages” and not “penalties” will have significant impact on wage-and-hour litigation. Plaintiffs can now avail themselves of the longer three-year statute of limitations, exposing employers who are in violation of the meal and rest break laws to greater liability. In addition, it is likely that plaintiffs will now seek restitution of these payments as unpaid “wages” pursuant to Business and Professions Code section 17200, thereby entitling them to an even longer four-year statute of limitations period. See Cortez v. Purolator Air Filtration Prods. Co., 23 Cal. 4th 163 (2000) (unpaid overtime “wages” may be awarded as restitution pursuant to section 17200). The ruling increases the amount of “waiting-time” penalties (i.e., an amount equal to the employee’s daily rate of pay for each day the wages remain unpaid, up to a maximum of thirty calendar days) and pre-judgment interest which a court may award. Further, employers could face sizable punitive damage awards on top of the payments due for meal and rest period violations, because while punitive damages are generally not available for an employer’s failure to pay a penalty, they are available for a failure to pay wages.

In sum, Murphy serves as an important reminder to all California employers to review their policies and practices on meal and rest periods and to seek counsel to ensure that they are in compliance.