For wage and hour attorneys, Wednesday's hearing in Murphy v. Kenneth Cole Productions, Inc. was one of the most anticipated California Supreme Court oral arguments in a long time. What follows here is our longest single blog post yet. There were two issues being heard, but the heart of the matter involved the characterization of the "additional hour of pay" under Labor Code § 226.7 as a penalty, a wage, or some other former of compensation. At stake: the statute of limitations, which would be one year if the pay is a penalty, three years if it is compensation, and, if it is a wage, four years (with the fourth year recoverable via Business and Professions Code § 17200). In more than a few pending cases, the difference represents several million dollars. The less newsworthy issue is whether, when an employee obtains an award on such a wage claim in administrative proceedings and the employer seeks de novo review in superior court, the employee can pursue additional wage claims not presented in the administrative proceedings.
For the employees, Donna Ryu of the Hastings Civil Justice Clinic argued on behalf of plaintiff John Paul Murphy. For the employers, Robert Tollen of Seyfarth Shaw LLP, for defendant Kenneth Cole Productions, split his time with amicus counsel Steven Drapkin. By all accounts, Ryu did an outstanding job for the employees, with Drapkin also performing quite well. Tollen, from what we've read and heard, focused more of his attention on less interesting points.
Ms. Ryu began by asserting that the purpose of the statute was to compensate employees for the tangible harms of having to work without breaks. However, almost immediately, Justice Kennard interrupted her and said, “let’s get to heart of issue.” She then quoted the statute, observed that it was undisputed that meal breaks weren’t given to Mr. Murphy, and then noted that this left us with the key question of whether the remedy under Section 226.7(b) is a wage or a penalty. Ryu responded that the plain language of the statute called it "pay." The legislature didn't use the word "penalty," and expressly rejected the use of that word. Justice Moreno responded by asking if her position then was that the statute is unambiguous. Ryu said it was. The use of the word "pay" is unambiguous, and the legislature has never had any trouble using the word "penalty" when it means to do so, as that word is used in other penalty statutes.
Justice Werdegar pointed out that the statute is grouped with other statutes that impose penalties. Ryu replied that initial versions of Section 226.7 included bona fide penalties ($50/$100). Justice Chin then posed his only question of the afternoon, asking what the legislative history offered. Ryu explained that the bill began with two elements: one to compensate, and one to impose a penalty. The legislature then dropped the penalty, leaving only compensatory remedy.
Justice Baxter then asked whether the fact that compensation was tied to employees’ compensation hurt or helped Murphy. He seemed to find that fact quite important, and later observed that he found it hard to believe that that the legislature, if it intended a penalty, would enact one that exacted a lower penalty for lower wage workers. "I can't see how the Legislature would want to go on record saying that denying a minimum wage employee is less important than denying a higher compensated employee." Anyhow, Ryu predictably responded by saying that this fact favored a finding that the remedy was compensatory, noting that it was calculated like other forms of pay, and reminding the justices that, unlike penalties, the hour of pay under section 226.7 is vested.
Justice Moreno asked about significance of the IWC calling it a penalty and whether this was binding upon the Supreme Court. Some observers have opined that this tipped Moreno's hand as favoring the penalty analysis, but we viewed this question as the proverbial "lobbed softball." At one point, Justice Moreno asked about comparisons to split shift and reporting time premium pay, and Ryu answered with "exactly." However, Justice Moreno also contrasted this hour of pay with the bonus pay for overtime work, asking whether the amount bears a rational relationship to the harm, as it does with overtime premium pay. Ryu answered that it was compensation, "and more importantly, it's the only compensation." (Editor's note: we're not at all sure we agree that it is the only compensation available.) There were many questions dealing with these analogies.
Justice Werdegar then asked: if meal periods are unpaid, and if an employee works through them, and they already got paid for the work, and then this statute gives them another hour of pay on top of it, "why is that not a penalty?" This line of questioning was one of the more obvious clues about a justice's position. We'll be shocked if Justice Werdegar finds the hour of pay to be a wage.
Justice Kennard noted that for meal periods, the extra pay is double. She then noted that one could argue (an interesting choice of words) that is could be viewed as a penalty." The justices then clarified that the meal period is supposed to be unpaid, but the rest period is paid, after which Justice Kennard summarized the employee's contention as one based upon a clear statutory scheme calling the remedy "pay," but asked Ryu to assume that the Court accepted the other side's argument and looked at extrinsic sources, such as legislative history, to interpret the statute. Ryu then focused on the overall context of the Labor Code. The hour of pay acts like all other premium pay provisions, and pointed out that if the pay is anything other than a penalty or forfeiture, the longer statute of limitations applies. It is, she said, a form of compensation for missed meal breaks. There is a real loss if someone doesn’t get a break and the one hour is merely a reasonable figure to compensate for this, “rough justice”, as she later called it.
Justice Moreno asked about other penalty provisions in the Labor Code, and how they are different. Ryu answered that, among other things, the legislature calls them all penalties, and added that the legislature knows how to draft a penalty provision if that is what it intends, i.e., Labor Code § 203, which coincidentally enough, we also part of the award in this case.
Justice Baxter asked about ramifications other than the statute of limitations, most specifically income tax. We thought this was also a softball, since there is an IRS opinion letter saying that such pay is a wage, taxable by the federal government as W-2 wage compensation. We recall this being mentioned in one of the companion briefs and/or requests for judicial notice. Ryu handled the question quite ably. At one point during the discussion, Ryu made the assertion again that the intent was to compensate, and Justice Werdegar interrupted her and called her statement conclusory: "To say it is compensation is conclusive. We have to determine whether it is or it isn't."
Werdegar cited court of appeal opinion (we didn't get the name or cite) finding that the amount was arbitrary. Ryu then began a discussion of other penalty cases outside the context of the Labor Code, and Moreno noted that this is an employment case and asked whether the Court had an obligation to interpret the statute liberally in favor of the employee.
One of Ryu last bits of discussion was among the more interesting. Justice Werdegar asked about the fact that the DLSE called the hour of pay a penalty. Ryu responded by reminding the Court that at the trial court level the DLSE was on Murphy’s side and took the position that it was a wage, and that position was backed up by a number of DLSE opinion letters, but by the time it got to appellate court the administration had changed from Davis's to Schwarzenegger's, and although there was no change in the statute and no change in the regulations, suddenly, there was a change in the DLSE position, and in the place of several opinion letters, there was a new precedent decision calling it a penalty. Such inconsistency makes those opinions worthless. Werdegar asked if the DLSE explained the reasons for its change (noting that she didn't think the Labor Commissioner would explain it quite as Ryu did), and Ryu enthusiastically answered that it gave none. This response elicited some puzzled expressions on certain justices' faces, and several took notes after that comment.
Justice Moreno asked for a comparison to Labor Code § 226 wage statement penalties, and Ryu responded by noting that en employee could elect either "actual damages" or the penalty under section 226(e), making it quite different from section 226.7 (again, we aren't so sure that there couldn't be a claim for damages or restitution for break violations). Ryu's time ended with a dry discussion of the secondary issue of whether new claims can be brought in a de novo proceeding in Superior Court.
The first thing Mr. Tollen did was address the new claims issue. No questions were asked. At one point, he complained that the “plaintiff’s bar” should sue the DLSE for being too slow. Once he finished with that issue, he began discussing the hour of pay and break violations. He argued several times, that breaking the law regarding meal periods was like a victimless crime. What is the harm if someone misses a thirty minute break? he asked. He characterized meal and rest breaks as a frivolous indulgence, and argued that employees who missed them lost nothing compensable.
Moreno asked about the fact that at the time 226.7 came into being, other statutes in same bill were enacted and those expressly imposed penalties. Every justice looked up to see Tollen's response. He answered by saying the Legislature had just adopted language that the IWC had put in its amendments to the wage orders in 2000. Justice Moreno noted that the bill kept penalty language in sections 203.1 and 226, but not 226.7. Tollen essentially blamed the Labor Commissioner, and went on to note that the Legislature sometimes actually called penalties "wages", such as section 203's mandate that delaying one's final paycheck results in "wages" continuing as a "penalty" for 30 days.
Chief Justice George, who to this point had been quiet, said that using the word “pay” is “very different” than using the word "penalty" and if intended the Legislature had intended a penalty, wouldn’t they have used the word “penalty”? He also asked if Tollen placed any weight on the placement of section 226.7 within the Labor Code. Tollen responded by reminding the Court that it was lumped in with a string of other penalty statutes.
Justice Baxter then brought the discussion back to what we considered the most relevant. The amount of a penalty is usually related more rationally to the culpability of the offender's conduct, rather than the value of the victim's labor. Worse conduct yields a greater penalty. But here, the "penalty" is smaller if the employee's labor is worth less. A minimum wage employee gets a smaller "penalty" than a highly compensated employee. Tollen answered by noting a similar valuation for penalties awarded under Labor Code § 203, and went back to his argument that it is a penalty because it pays the employee for a violation that causes no actual harm or injury.
Justice Corrigan then asked whether employees were being so overcompensated for missed breaks that it amounted to a penalty. She raised this point several times throughout the argument, and in so doing, probably revealed how she will vote. More importantly, she seemed to be unfamiliar with the break requirements (referring once to 15 minute breaks) and she oversimplified the analysis, commenting that the pay was double. In reality, the percentages vary depending upon which break is denied and how many breaks are denied. Before running out of time, Tollen briefly mentioned the use of the word penalty in a letter written by the author of the bill, and it was Mr. Drapkin's turn to speak.
He argued that the very definition of a penalty is compensation without reference to the damage caused. Kennard asked him whether, in a claim arising under the Labor Code, the Court had obligation to construe the statute liberally. He responded that the statute being construed wasn't a Labor Code statute, it was a section of the Code of Civil Procedure. In general, Drapkin did not draw many questions (which bodes well for the employer), and our spies had fewer notes regarding his argument because the questions were of more interest to us than the prepared remarks. For a good summary of his argument, check out the UCL Practitioner's post on the matter.
When Ryu stood up for rebuttal, she was peppered with questions that began before she uttered her first comment. First, Justice Corrigan asked how an employee is harmed by missing a meal break, adding that, since the employee already gets paid to work through lunch this additional payment seems like a penalty. Justice Werdegar seemed to agree, noting that an award that is not tied to amount of time worked or the value of the injury seems like a penalty. Ryu responded with her "rough justice" argument, that the pay compensates a worker for the extra value of putting in long hours without the needed and legally mandated breaks. The final point was a reiteration of the disagreement over whether this is a Labor Code issue (liberally construed in favor of employees) or a CCP matter, with no policies favoring one side or the other. Justice Kennard answered that one for her: it's not just a CCP issue, it's also a Labor Code matter. With that, the arguments concluded.
Along the spectrum, Justices Baxter and George appeared to be solidly favoring the wage/compensation argument; Justices Kennard and Moreno each asked several questions which could suggest a predisposition either way; Justice Chin asked only one question, which shed little light on his views; and Justices Werdegar and Corrigan seemed firmly behind the penalty argument. We were surprised by both Baxter and Werdegar, and would have expected them to hold views contrary to what their questions suggested.
How you see it seems to be depend upon where you sit. Kim Kralowec, whose firm represents the class against Wal-Mart, believes there will be a split decision calling it a wage. Jon-Erik Storm, with Employer Advocates Group LC, sees a split decision favoring Kenneth Cole Productions. At a seminar today, defense attorney Richard Simmons expressed his belief that the Court would find the hour of pay a penalty and Werdeger would write the opinion. Of the five employee's attorneys we spoke to, three saw it 4-3 in favor of the employee, two said it would be 5-2 in favor of the employee. Of the three defense attorneys we spoke to, one saw it 5-2 in favor of the employer, one saw it 4-3 or 5-2 for the employer, and one said he was preparing for a "bad decision" but hoping he misread Moreno and Kennard.
Thank you to Mary Dumont, Alan F. Cohen, and three other attorneys who sent me some quite detailed notes.