United States: Meal And Rest Period Claims: California Supreme Court Hands Employers A Setback

On April 16, the California Supreme Court unanimously decided that the payments to employees for missed meal and rest periods are wages or premium pay, not penalties. Therefore, claims for missed meal and rest breaks under the Labor Code are governed by a three-year statute of limitations. The decision in Murphy v. Kenneth Cole Productions will clearly result in the filing of even more meal and rest period cases against employers. Jury awards and settlement amounts will very likely increase.

The Kenneth Cole decision will mean that a three or even four-year statute of limitations governs claims for the payments required by Labor Code § 226.7 when an employee is not provided with a required meal or rest period. An employer’s failure to comply with meal and rest period rules may lead to yet additional liability. For example, an employee who is terminated without being paid for missed meals or rest periods would have been paid improperly. Penalties for a "short" final paycheck are available to such an employee under Labor Code § 203, in an amount not exceeding thirty days’ pay. Further, additional penalties could be awarded for other Labor Code violations flowing from the failure to provide required meal or rest periods. Those penalties could be recoverable by employees in a private action under the Labor Code Private Attorney Act ("PAGA") and, in a private civil action, an aggrieved employee may recover attorneys’ fees and costs. The long statute of limitations established in Kenneth Cole, together with the potential for additional penalties and attorneys fees, will create an even greater incentive for attorneys to bring individual and class actions against California employers.

California Meal and Rest Break Requirements

Labor Code Section 512 requires that each private sector employer "provide" an unpaid meal period to all non-exempt employees who work a shift of more than five hours in a day, except if the total work period per day is no more than six hours, the meal period may be waived by mutual consent of both the employer and employee. The unpaid meal period, which must be at least thirty minutes, must commence before the end of the fifth hour of employment.¹ If a non-exempt employee works more than ten hours in one day, the employee is entitled to a second unpaid meal period of at least thirty minutes. Some advocates, including some members of the legal staff of the Division of Labor Standards Enforcement ("DLSE") assert that the employer must in essence force or require employees to take a thirty-minute meal period. A California Court of Appeal, relying on a 2002 opinion letter from the DLSE, found that employers have "an affirmative obligation to ensure that workers are actually relieved of all duty [during the meal period]. Cicairos v. Summit Logistics, Inc., 133 Cal.App.4th 949, 962-963 (2005).

A provision of the Industrial Welfare Commission Wage Orders requires all employers to keep records showing the beginning and ending time of each work period, as well as meal periods, split shift intervals and total daily hours worked. Without the necessary records, the employer is vulnerable to claims that meals were taken later than the required time, or were not provided at all.

Rest period requirements are somewhat less onerous. No Labor Code statute requires rest periods. However, the Industrial Welfare Commission ("IWC") Wage Orders for many years have required that the employer "authorize and permit" rest periods for all non-exempt employees. The rest periods must include at least ten minutes of "net" rest time for each four-hour work period or a major fraction thereof. Rest periods are supposed to occur in the middle of the work shift to the extent practicable. Unlike meal periods, there is no requirement that the time of the rest period be documented in employee time records. Because the employer’s duty is only to "authorize and permit" rest periods, the DLSE historically has required only that employers notify employees in writing of their right to take rest periods and refrain from discouraging or prohibiting employees, either directly or by pressure from supervisors to skip rest periods.

Labor Code section 226.7(d) provides that "If an employer fails to provide an employee a meal period or rest period in accordance with an applicable order of the Industrial Welfare Commission, the employer shall pay the employee 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." Prior to the Kenneth Cole decision, the California trial courts and Courts of Appeal had split as to whether the "additional hour of pay" is a form of wages or a penalty. The wage/penalty issue is extremely important because the statute of limitations in California for recovery of a penalty is one year, whereas the statute of limitations on wage claims is three years. Since unpaid wages can also be recovered in claims under the Unfair Competition Law, Business & Profession Code § 17200, a fouryear statute applies for UCL claims.

The Kenneth Cole Decision

Plaintiff Murphy worked as a store manager in a Kenneth Cole retail clothing store. After he resigned he filed a wage claim with the Labor Commissioner, in which he sought unpaid overtime and waiting time penalties. He did not make a claim for missed rest and meal periods, or itemized pay statement violations. After a hearing the Labor Commission issued a decision, finding that Kenneth Cole failed to establish that Plaintiff was exempt and awarding overtime, interest and waiting time penalties. Kenneth Cole appealed to the Superior Court. In the Notice of Claims and Issues at the Superior Court de novo trial, Murphy asserted claims for meal and rest period and itemized pay statement violations, as well as the overtime and penalty issues that were tried before the Labor Commissioner. Over Kenneth Cole’s objection, a trial de novo proceeded on all issues. The trial court issued a judgment awarding Plaintiff Murphy unpaid overtime, payments for missed meal and rest periods, penalties for failing to furnish itemized pay statements, waiting time penalties, prejudgment interest, costs and attorneys’ fees. The trial court applied a three-year statute of limitations to the claim for payments for meal and rest period violations.

The Court of Appeal affirmed in part and reversed in part, holding the Labor Code section 226.7 payments assessed for meal and rest period violations are penalties subject to a one-year statute of limitations and that claims may not be raised for the first time on de novo appeal from an administrative hearing in front of the Labor Commissioner. The California Supreme Court reversed the decision on these two issues.

Section 226.7’s Additional Hour of Pay Constitutes "Wages"

Although the Supreme Court found that the statutory language "suggests" that section 226.7 payments are wages, it concluded that the language was ambiguous. As a result, the Court looked at extrinsic sources, such as the objectives to be achieved by the statute, the legislative history, the public policy involved, contemporaneous administrative construction and the statutory scheme of which the statute is a part. The Court found that each of these extrinsic sources supported a finding that the payments are wages.

Notably, when discussing the legislative history, the Court found that Senate amendments eliminated the requirement that an employee file an enforcement action, thus creating an affirmative obligation on the employer to pay the employee one hour of pay for violations. Under the amended version of section 226.7, an employee is entitled to the additional hour of pay immediately upon being forced to miss a rest or meal period. Thus, it is akin to an employee’s immediate entitlement to payment of wages or overtime.

The Court found that the IWC intended that, like overtime pay provisions, payment for missed meal and rest periods be enacted as a premium wage to compensate employees, while also acting as an incentive for employers to comply with labor standards. However, "whatever incidental behavior-shaping purpose section 226.7 serves, the Legislature intended section 226.7 first and foremost to compensate employees for their injuries."

The Court also rejected arguments that the amount paid "functions" as a penalty because the "additional hour of pay" is imposed without regard to the actual loss suffered. The Court stated that "Section 226.7 pay is not transformed into a penalty merely because a one-to-one ratio does not exit between the economic injury cause by break violations on the one hand and the remedy selected by the legislature on the other." The Court pointed out that there are many examples of the Legislature selecting an amount of compensation paid based on the employees regular rate of pay, without converting that remedy to a penalty – overtime wages, reporting time pay and split shift premiums among them.

In a footnote, the Court rejected the DLSE’s current interpretation that section 226.7 payments are penalties, subject to a one-year statute of limitations. The DLSE had previously issued opinion letters interpreting the payment as constituting "premium pay" or "wages," which it then withdrew in a "politically charged" atmosphere. When the agency’s current construction of the statute "flatly contradicts" its past interpretation, it is not entitled to "significant deference."

Finally, the Court found that there was no risk of stale claims once evidence is no longer fresh and witnesses no longer available because employers are required to keep all time records, including records of meal periods, for a minimum of three years. Cal. Code Regs., tit. 8, section 11070, subd. 7(A)(3) & (C).

Section 98.2 De Novo Trial May Include Additional Wage Claims

An employee pursuing a wage claim has two principal options: (1) the employee may seek relief through an ordinary civil action; or (2) the employee may seek administrative relief by filing a claim with the Labor Commissioner. A hearing in front of the Labor Commissioner is designed to provide a speedy, informal and affordable method of resolving wage claims. If the employee proceeds by administrative hearing, he or she will receive a notice of an award that the parties may seek review of by filing an appeal. The appeal is heard de novo, and in the appeal, the decision of the Labor Commissioner is entitled to no weight whatsoever.

The Supreme Court found that permitting the trial courts to exercise jurisdiction over the entire wage dispute, including related wage claims not raised before the Labor Commissioner, is consistent with the trial court’s broad discretion in adjudicating claims at trial. The Supreme Court also found that this would be the most efficient way to proceed, instead of forcing the employee to bring a separate lawsuit or Labor Commissioner proceeding for new claims. Finally, the Supreme Court reasoned that permitting employees to raise additional related wage claims is consistent with the Legislature’s intent to discourage unmeritorious appeals of Labor Commissioner awards. An employer who appeals a Labor Commissioner award does so knowing an employee may find new claims to assert.

The Kenneth Cole decision has extensive and troublesome implications for employers. First, by providing an extremely long period for recovery (four years in the case of UCL/wage claims), it will increase the exposure of employers for both pending claims and those which may not yet be asserted. This aspect of the decision, alone, will likely encourage the filing of additional claims that employees were not "provided" with required meal or rest periods. In such cases, the employer frequently has inadequate records. The lack of records puts the employer at a distinct disadvantage. Employees can easily claim not to have taken or been "provided" with meal periods, and there is no way conclusively to disprove the allegation.

The finding that payment required by Labor Code § 226.7 are "wages" means that those amounts must be paid upon termination of employment. The Kenneth Cole opinion indicates that these payments are "selfexecuting," meaning that they must be paid during the pay period in which employees miss meal or rest periods. An employee who is terminated without receiving all "wages" due, including the missed meal period payments, may recover "waiting time" penalties under Labor Code § 203 for a period not to exceed thirty days’ pay. In some cases, an employee could also seek to recover penalties under Labor Code § 226(e) by proving that the employer made a "knowing and intentional" failure to provide accurate pay stub information.

One unresolved issue is whether, assuming more than one meal or rest violation occurred in a single day, the employee is entitled to one hour’s pay for the entire day, or an hour’s pay for each violation. The statutory language seems to indicate that there is a maximum payment of one hour per day. The DLSE has taken the position that meal and rest payments are separate, but that there is a maximum payment of one hour per day for each variety of violation. This would mean that the maximum exposure if multiple violations were to occur would be a payment of two hours per workday. It remains unclear how the Supreme Court would interpret the issue.

A potentially even larger issue is whether civil punitive damages under Civil Code § 3294 may be awarded for Labor Code violations. Many employers are aware of the 2006 verdict against Wal-Mart, awarding $115 million in punitive damages in addition to other amounts, for meal period violations. As the payments for missed meal periods now have been characterized as "wages," plaintiffs’ attorneys will be emboldened to argue that punitive damages should be awarded where the employer was guilty of oppression, fraud or malice. There are numerous legal arguments why punitive damages should not apply to Labor Code violations, but this issue is yet another that remains to be litigated.

A change in the underlying statute, to lessen the exposure to employers, seem likely. The composition of the Legislature at present makes a legislative solution unlikely. Governor Schwarzenegger previously proposed, but then withdrew, regulations that would have clarified the meal and rest period rules and would have established that the section 226.7 payment is a penalty.

An employer’s best, and perhaps only, response to the Kenneth Cole decision is to make sure there is full compliance with meal and rest period requirements, including the record-keeping rules.

Employers must take all reasonable steps to ensure compliance with meal and rest break rules. Proper compliance monitoring should include the following:

• Review of the company’s payroll system to make sure that meal periods are being properly recorded in compliance with the Wage Order.

• Review of the company’s employee handbook to make sure that the meal and rest period requirements are clearly stated.

• Review of the company’s lunch room or employee postings to make sure that the appropriate Wage Order is prominently posted at all appropriate locations.

• Review of the company’s orientation procedures to make sure that meal and rest periods are discussed with new hires.

• Review of the company’s training programs to insure that meal and rest period compliance is discussed in training sessions with supervisors.

• Vigilance on the part of human resource staff to any rumors, reports or complaints that employees are being discouraged from taking meal or rest periods.

• Review of the company’s payroll system to make sure that, where an employee fails to record a meal period, or takes a meal later than lawfully required, the employee is paid an additional hour’s pay for that day.

• Review of the company’s classification of employees as exempt or non-exempt for overtime purposes, so that persons who should be classified as non-exempt will receive meal and rest periods as well as overtime compensation if overtime hours are worked.

• Monitoring of any meal or rest period claims brought against competitors or employers who have facilities in the immediate vicinity.

Employers in industries such as retail and food service, which have been especially targeted for these claims and for which centralized monitoring is often difficult, should also consider additional protective steps:

• A policy that employees will automatically be paid an hour of wages if they work more than six hours and do not record a meal break.

• Systematically request written waivers of meal periods when the employee works more than five but no more than six hours during a shift, if that is a common shift length. While a written waiver is not required, if the employer has the ability to systematically gather such waivers it would be strong evidence to protect it from meal claims based on this type of shift.

• Have employees acknowledge that they were provided required breaks as part of the automated clock-in and clock-out procedures.

• Ensure that store managers’ performance is expressly monitored for wage and hour compliance, including meal and rest break compliance. Such monitoring should be part of supervisor meetings and performance reviews.

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.