The Murphy v. Kenneth Cole Decision: Another Huge Victory For Employees

After all of the complicated arguments in the wage/penalty debate, future points and authorities regarding the issue can now be boiled down to a single sentence and citation:

The “additional hour of pay” due to an employee under Labor Code § 226.7 is a wage, not a penalty. Murphy v. Kenneth cole Productions, Inc. (2007) __ Cal.4th __.

The holding was brief:

We hold that section 226.7’s plain language, the administrative and legislative history, and the compensatory purpose of the remedy compel the conclusion that the “additional hour of pay” is a premium wage, not a penalty. We further hold that the trial court properly exercised its discretion in deciding to consider the additional, but related, wage claims during the de novo trial.

The implications go a bit further than the holding, however. They include:

• Because the hour of pay is a wage, and not a penalty, employees can avail themselves not only of the three-year statute of limitation, they can plead a claim for restitution for any hours of pay that were withheld up to four years prior, under an unfair competition theory. Cortez v. Purolator Air Filtration Prods. Co. (2000) 23 Cal.4th 163.
• Prevailing parties in meal and rest period cases can recover attorney's fees. Labor Code § 218.5.
• Prevailing employees can recover pre-judgment interest. Labor Code § 218.6.
• Employers can be held liable for waiting time penalties under Labor Code § 203 for employees who have not been paid for the additional hours of pay due to them as of the time their employment concludes.
• Employers could face sizeable punitive damage awards on top of the wages due for break violations, since the primary argument relied upon (i.e., in the Wal-Mart case) was that one could not recover punitive damages for failure to pay a penalty.
• Employers could face additional penalties under the Private Attorney Generals Act (PAGA) arising from a failure to pay meal and rest period pay.

Regarding the second part of the holding, it is fairly clear that employees who lose a claim at the Labor Commissioner's office can appeal and assert completely different theories in Superior Court as part of the de novo review process, and in most cases, can include in that claim, any other claims reasonably related to the claims heard by the Labor Commissioner, although a trial court exercising its discretion could determine that claims were not sufficiently related to allow their addition to the de novo trial. The opinion strongly suggested that a trial court's refusal to permit litigation of related or additional wage claims would be an abuse of discretion. "[F]orcing Murphy to file an original civil action to raise the additional claims would appear inconsistent with the legislative purpose under Labor Code section 98 of providing an expeditious resolution of wage claims."

Among my own circle of friends and colleagues in the defense bar, only one of them saw this coming. So what was the Supreme Court thinking? For those who are curious, here is a basic outline of their reasons:

• First and foremost, as Justice George's comments during oral argument hinted, the court agreed with the argument that the plain language of Section 226.7 supported calling the hour of pay a wage. The opinion italicized the phrase in the statute which stated: "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.”
• The Court of Appeal reversed without analyzing the statutory language.
• “Pay” is defined as “money [given] in return for goods or services rendered.” (Am. Heritage Dict. (4th ed. 2000) p. 1291.) This definition is in keeping with the Labor Code definition of “wages.”
• This was not a CCP issue. It was a Labor Code issue that would determine which CCP section applied. The language of section 226.7 is to be interpreted broadly in favor of protecting employees, in keeping with the public policy in California holding that "statutes regulating conditions of employment are to be liberally construed with an eye to protecting employees."
• Though the plain language supported calling the hour of pay a wage, the language is also reasonably susceptible of an interpretation that the hour of pay is a penalty intended to punish the employer for denying employees their meal and rest periods. As a result, the court could look to extrinsic sources, but those also supported calling the hour of pay a wage.
• The administrative and legislative history demonstrates intent to establish a premium wage to compensate employees.
• The Legislature knows how to impose a penalty when it wants to, having established penalties in many Labor Code statutes by using the word “penalty.”
• The enacted of meal and rest period requirements was a matter concerning the health and welfare of employees.
• Though KCP argued that section 226.7 was located in a part of the code that includes several other penalties, when the IWC amended its wage orders regarding the provision of meal and rest periods, it added the remedy to sections 11 and 12 of the wage order, rather than section 20, which deals with penalties.
• Although the original version of Bill No. 2509 provided for both a penalty and a payment to the employee, it limited the employees’ recovery to the payment, leaving collection of the penalty to the Labor Commissioner, as had been the typical practice.
• Unlike the penalties to which the defense compared the hour of pay for meal and rest period violations, section 226.7 is measured by the employee’s rate of pay rather than an arbitrary amount, and is not labeled a penalty. (We personally considered this to be among the most compelling arguments)
• Labor Code provisions imposing penalties state that employers are “subject to” penalties and the employee or Labor Commissioner must first take some action to enforce them. The right to a penalty, unlike section 226.7 pay, does not vest until someone has taken action to enforce it.
• The DLSE's precedent decision was not entitled to significant deference. The matter was highly politicized, and whenever an agency’s construction "flatly contradicts" its original interpretation, it is not entitled to “significant deference.”
• The "motives or understandings of individual legislators, including the bill’s author, were irrelevant.
• Though the IWC mentioned the word "penalty" in its original analysis, it used the word in the context of a comparison to "penalties" like overtime pay provisions, thus, "the manner in which the IWC used the word “penalty” undermines the Court of Appeal’s reliance on the use of the word in the legislative history."
• Neither of the two fundamental rationales relied upon by the Court of Appeal were persuasive. First, the remedy’s dual purpose of both compensating employees and shaping employer behavior did not make the hour of pay a penalty. Overtime pay, reporting-time and split-shift pay serve a similar dual function. (citing Caliber Bodyworks, Inc. v. Superior Court [split-shift pay is wages]; and Huntington Memorial Hospital v. Superior Court [reporting-time pay is compensation].)
• Second, the fact that the “additional hour of pay” is imposed without regard to the actual loss suffered does not make it a penalty merely because a one-to-one ratio does not exist between the economic injury caused by meal and rest period violations on the one hand and the remedy selected by the Legislature on the other hand.
• Courts have long recognized that the monetary value of harm to employees can be difficult to ascertain.
• The focus on the apparent lack of a perfect correlation between the section 226.7 remedy and the employee’s economic injury also ignores the noneconomic injuries employees suffer from being forced to work through rest and meal periods. Employees denied their rest and meal periods face greater risk of work-related accidents and increased stress, especially low-wage workers who often perform manual labor.
• Additionally, being forced to forgo rest and meal periods denies employees time free from employer control that is often needed to be able to accomplish important personal tasks. While it may be difficult to assign a value to these noneconomic injuries, the Legislature has selected an amount of compensation it deems appropriate.
• Construing the pay as a penalty "would illogically result in an employer being 'penalized' less or more, depending on the affected employee’s rate of pay. Employers of the low-wage workers likeliest to suffer violations of section 226.7 (and, arguably, at greatest risk of injury) would be 'penalized' less than employers of highly paid workers.
• Finally, we recognize that the primary purpose of the statutes of limitation is to prevent plaintiffs from asserting stale claims once evidence is no longer fresh and witnesses are 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, § 11070, subd. 7(A)(3) & (C)), employers should have the evidence necessary to defend against plaintiffs’ claims.

Two other interesting details mentioned in the opinion: 

• Murphy had he sought to file a claim for itemized pay statement violations at the DLSE, but it is the policy of the Labor Commissioner to deny requests to file such claims.
• KCP appealed the trial court’s determination that Murphy was non-exempt and lost. KCP's request for review of the determination of Murphy’s nonexempt status was denied by the Supreme Court.

We've read more than a few comments by employer-side attorneys expressing total shock at the outcome. To be honest, we thought that the air of confidence expressed almost unanimously by the defense bar was posturing designed to encourage plaintiffs to settle their claims before Murphy was decided. It appears now to have been nothing of the sort. It looks like many defense attorneys advised their clients to wait for the Murphy decision so that they could settle their cases for a lot less money. That advice turned out to be very ill indeed. It makes sense that anyone who rendered such advice would now say that the Supreme Court's decision was shocking, but really, it was not. We were extremely confident until Justices Corrigan and Werdegar gave us reason to pause with their questions at the argument. But with the notable exception of a split decision in the two key Prop 64 issues, the trend in this decade (Kraus / Cortez, Armendariz, Sav-On, Discover Bank, Pioneer Electronics, Murphy) has strongly favored consumers and employees in these types of cases. Each time, the victory seemed to catch the defense bar by surprise. Next up: Gentry? There is no hearing date yet set in that case, but it is likely to be the next big thing in wage and hour litigation until the Wal-Mart appeal winds its way to the Supreme Court.

Congratulations to the entire team of Murphy's lawyers and amici counsel, who did an outstanding job presenting this case to the Supreme Court. They include: Hastings Civil Justice Clinic, Donna M. Ryu, Nancy M. Stuart and Miye A. Goishi for Plaintiff and Respondent; Weinberg, Roger & Rosenfeld, David A. Rosenfeld, Theodore Franklin, Suzanne M. Murphy, Patricia M. Gates, Anne I. Yen and Jessica Christensen for Alameda County Central Labor Council, California Conference of Machinists, Contra Costa County Central Labor Council, National California Carpenters Regional Council, SEIU United Healthcare Workers-West, South Bay Central Labor Council, California Labor Federation, AFL-CIO, and International Association of Machinists and Aerospace Workers, District Lodge 725, AFL-CIO, as Amici Curiae; Cohelan & Khoury and Michael D. Singer for California Employment Lawyers Association as Amicus Curiae; California Rural Legal Assistance, Inc., Cynthia L. Rice; Legal Aid Society-Employment Law Center, Matthew Goldberg and Michael Gaitley for Maria Leticia Banda, Asian Law Caucus, Inc., Asian Pacific American Legal Center of Southern California, Bet Tzedek Legal Services, Centro Legal de La Raza, East Bay Community Law Center, Garment Worker Center, Golden Gate Women’s Employment Rights Clinic, The Impact Fund, Katharine & George Alexander Community Law Center, Koreatown Immigrant Workers Alliance, La Raza Centro Legal, Legal Aid Foundation of Los Angeles, Neighborhood Legal Services of Los Angeles County, Stanford Community Law Clinic, Sweatshop Watch, Young Workers United and Rocia Zetina as Amici Curiae on behalf of Plaintiff and Respondent; Neyhart, Anderson, Flynn & Grosboll, John L. Anderson and Scott M. DeNardo for California Teamsters Public Affairs Council and California Conference Board of the Amalgamated Transit Union as Amici Curiae; Roxborough, Pomerance & Nye, Michael B. Adreani and Marina N. Vitek for Jennifer Augustus as Amicus Curiae.

KCP was represented by Seyfarth Shaw, Robert W. Tollen and George E. Preonas. Amici Curiae on behalf of KCP included Cooley Godward Kronish, Michelle C. Doolin, Lori R. E. Ploeger, Leo P. Norton and Kelly A. Weber for The Yankee Candle Company, Inc.; Steven B. Katz for Circuit City Stores, Inc., and Chevron U.S.A., Inc.; Sidley Austin and Jeffrey A. Berman for California Association of Health Facilities; Law Offices of Steven Drapkin and Steven Drapkin (who argued the case for the amici) for California Employment Law Council, Chamber of Commerce of the United States of America, California Chamber of Commerce, California Restaurant Association, Alliance of Motion Picture & Television Producers, Airline Industrial Relations Conference and California Lodging Industry Association; Sheppard Mullin Richter & Hampton, Richard J. Simmons and Geofrey D. DeBoskey for Employers Group, California Retailers Association, National Retail Federation and California Hospital Association.

Comments

[kent]

Isn't this a big win for both employers and employees?

I know for litigators, this is an employee victory (three/four years statute, fees, interest, punitives, etc.). But, from a daily management perspective (some people work rather than litigate for a living), it's an employer win.

Rather than violate the Labor Code and Wage Orders, now employers can force employees to work through (skip) mandatory meal and rest breaks. Instead of facing penalties, employers need only pay a "premium" for refusing to allow breaks. Just as FLSA makes it illegal to employ workers for over 40 hours unless you pay overtime, now it's illegal to violate break rules unless you pay a premium wage. Employers are thus "discouraged" and "disincentivized" rather than prohibited from forcing employees to work without breaks.

Sure, everyone had "lunch meetings" when going off-duty wasn't permitted, but that at least had the whiff of an illicit requirement that violated of the law. For example, if someone refused to work through lunch and was fired, I assume that would be a firing in violation of public policy (the requirement for off-duty breaks). Now, however, it's permissible to require the skipping of an off-duty break (and likewise permissible to fire someone who refuses to give up their off-duty meal break) provided the extra-hour premium is paid.

[michael walsh]

Nothing in the opinion says that employers can force employees to work through mandatory meal and rest breaks. To the contrary, the court noted that the break requirements were a matter of health and workplace safety. The question wasn't whether employers could avoid penalties by paying the hour of pay. The question was whether the hour of pay was, itself, a penalty. Employers who decide to simply pay the hour and continually disregard the Wage Orders will find themselves (i.e., Darden Restaurants, Wal-Mart) facing verdicts that include BOTH the hour of pay and penalties or punitive damages.

[kent]

Thank you for your reply. I understand the opinion was characterizing the "extra hour" rather than examining the underlying situation (employers forcing employees to skip breaks). Even so, the practical consequences -- that employers must pay an extra hour when they force employees to skip a break -- authorizes that activity rather than prohibits it.

The opinion makes clear the additional hour of pay is compensation for the employee's losses, and points out that a penalty was included in the initial version (but deleted from later versions) of AB 2509. This appears to suggest that there isn't a penalty involved in requiring employees to skip breaks, but only compensation to them (ala overtime premium pay).

If requiring employees to work through breaks is still "illegal" (violates the Wage Orders), the payment of the premium hour would be an admission by the employer of violating the Wage Orders. And the fact that it was a knowing violation would prompt punitives for willful disregard of rights, wouldn't it? Basically, if forcing employees to skip lunch is still illegal, the decision requires the employer to pay extra for an illegal act (kind of like requiring drug dealers to pay for tax stamps to sell illegal drugs).

Can you think of any other illegal act that requires premium pay (e.g., maybe we should require employers to pay 2x the regular rate when sexually harassing an employee)? When is premium pay required other than for permissible work?

In contract law, there's a difference between (1) a breach (violation) and remedy and (2) an alternative performance contemplated by the contract. I'm suggesting that the Supreme Court has said that employers may simply comply with an "alternative" to providing a break by paying 226.7 wages, rather than that they are in violation of the law.

Do you think employers have to pay extra for making employees skip lunch but can't make them skip lunch? Is your view that only if they "continually disregard" the break rules that they'll bother someone enough to prompt penalties, but otherwise they can flaunt violations here and there?

For example, if an employer wanted to have a working lunch meeting, would you say you can't do it legally at all, or would you say you might get away with the violation if you pay for the worktime plus the premium (and assume the risk of additional penalties, a misdemeanor conviction, and punitive damages), or would you say that it was sanctioned by this opinion?

[michael walsh]

The fact that the hour of pay is a wage does not mean that it is the only consequence to the employer. You read too much into the opinion. The opinion simply does not address, in any way, an employer's ability to avoid other punishment for violating the wage orders. There is none.

You ask for an example. Here's a good example: Disregarding the break requirements is much like disregarding Labor Code sections 551 and 552 (551: "Every person employed in any occupation of labor is entitled to one day's rest therefrom in seven." 552: "No employer of labor shall cause his employees to work more than six days in seven.") The wage orders provide that employees working on a seventh day get overtime pay, at either 1 1/2 times (for the first 8 hours), or double time (after 8 hours). However, that does not satisfy the employer's obligation to have obeyed sections 551 and 552 in the first place. See also section 553: "Any person who violates this chapter is guilty of a misdemeanor."

An employer who works an employee for 30 days in a month must pay the premium rate of pay on every seventh day, but may also face injunctive relief, penalties, punitive damages or criminal prosecution, though such consequences are unlikely if the violations are few.

My responses to your final three questions would be
1. Yes.
2. Yes.
3. Sometimes an on-duty lunch period can sometimes be permitted, but this opinion did nothing to address such circumstances.

[BP]

Is the Supreme Court's decision really that difficult to understand? To me it's as simple as 1, 2, 3:

1. If an employer doesn't provide a timely meal break to an employee, the employee is due one (1) hour of extra pay, to be paid at the employee's "regular rate."

2. The extra payment is a wage, not a penalty. Hence, it is subject to a 3 year statute of limitations claims period (4 years in a B&P 17200 case).

3. As a wage, a terminated employee can pursue LC 203 waiting time penalties if he/she did not receive payment of this wage at the time of discharge/termination.

From an employee financial perspective, that't it! However, least anyone think the Supreme Court is providing a legal safe haven for employers to deprive employees of their legally-mandated LC 512, meal breaks (at the cost of one hour of extra pay), do not overlook the trump card of LC 553: "Any person who violates this chapter is guilty of a misdemeanor," with all of its attendant legal consequences.