Employment Law Update

December  6, 2005

Highlight Article

The California Court of Appeals brings an early Christmas gift to Employers, holding that meal and rest breaks are penalties and subject to a one year statute of limitations, not three years

By Monica Sanchez

On December 2, 2005, the California Court of Appeal in Murphy v. Kenneth Cole Productions Inc., 2005 DJDAR 13877, held that the extra hour of pay for meal and rest period violations in Labor Code § 226.7 is a penalty and not a wage.  This ruling is the first definitive answer issued by a California State Appellate Court addressing this important issue.  The opinion may be subject to further review by the California Supreme Court.  However, the impact that this ruling will have on both employers and employees, who are caught in this debate, can be significant.

Under California Labor Code § 226.7, an employer who fails to provide meal or rest breaks to their non-exempt employees must pay their employees one extra hour for each day the breaks were not provided. There has been extensive debate and conflicting opinions, whether this extra hour constitutes a “penalty”, which is subject to a one year state of limitations, or a “wage,” subject to a three year statute of limitations.  The potential liability for an employer who has to pay per-diem and per-employee violations can be astronomical.

OVERTIME COMPENSATION AND EXEMPT EMPLOYEES

Mr. Murphy was hired as a store manager at Kenneth Cole Productions, Inc (hereinafter “KPC”), a retail clothing store in San Francisco, California.  The trial court recognized that Mr. Murphy performed some managerial tasks 10 percent of the time, such as handling personnel issues, working through the weekly scheduling, payroll and business recap processes and paperwork, and communicating with the district and regional managers and the corporate office on behalf the store.  The trial court also concluded, that the remaining 90 percent of Mr. Murphy’s time was spent performing non-exempt tasks, such as sales, stocking products, processing shipments, and cleaning the store. 

Therefore, the trial court held, and the appellate court agreed, that Mr. Murphy was misclassified as exempt and should have been classified as a non-exempt employee as a matter of California law.  The Court awarded him damages for unpaid overtime.  However, the Court added in a footnote, “[w]e are not holding that every manager who otherwise meets the criteria for exempt status would lose that status by assisting nonexempt employees in performing nonexempt job duties.”  “Thus, the working manager who directs the work of others, has authority to hire and fire, exercises independent judgment and is primarily engaged in exempt duties would not lose the exemption merely by helping out with nonexempt tasks.  The problem with KPC’s proof in this case is that it failed to show that [Mr.] Murphy met the criteria of the [overtime] exemption.”

RAISING NEW CLAIMS IN DE NOVO APPEAL

Mr. Murphy initially filed his complaint for overtime compensation with the Labor Commissioner.  However, he failed to raise the claims of rest break, meals break and itemized pay stub violations in his claim field with the Labor Commissioner.  An employee who seeks payment of wages due has two options: 1) the employee can file an ordinary civil action against the employer or 2) file a wage claim with the Labor Commissioner.  Following a decision of the Labor Commissioner, either party can seek review by filing an appeal in Superior Court, where the appeal will be heard “de novo”. 

Mr. Murphy contended that because an appeal is “de novo” and requires an entirely new trial with new evidence, he can raise any new wage-related claims.  The Court disagreed, and stated, “[t]he process is a review of the ‘decision or award’ rendered by the Labor Commissioner reviewed by new trial in superior court and not a de novo trail of new claims never heard before.” 

However, under these facts, if the statute of limitations had not run on Murphy’s claim of rest break, meals break and itemized pay stub violations he could have filed a civil complaint and sought consolidation with the appeal.  Alternatively, Mr. Murphy could have filed another timely civil complaint with the Labor Commissioner.  The characterization of the nature of the payments for failure to provide meal and rest period breaks affects the relevant statute of limitations. 

MEAL/REST PERIOD PAYMENTS AS A PENALTY

Labor Code § 226.7 provides, “[I]f an employer fails to provide an employee a meal period or rest period in accordance with applicable order of the Industrial Welfare Commission [wage order], 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 parties brought it to the attention of the Court that the Division of Labor Standards Enforcement (hereinafter “DLSE”)  had recently changed its interpretation of the payment imposed for meal and break violations.  The DLSE announced that the payment for meal and break violations constitutes a penalty, and not a premium wage, in a precedent decision, by memo dated June 17, 2005, in case number 12-56901RB. 

California Government Code § 11425.60 allows for the designation as a “precedent decision” any decision that contains a significant legal or policy determination of general application that is likely to reoccur.  Precedent decisions are binding on any case that is heard before the Division’s Deputy Labor Commissioners and Hearing Officers to the extent that they include the same legal or policy issues determined as precedent.   The Court in Murphy, explained that the task of the Court is to interpret the statutes in question and the wage order regulations. 

The Court did not base their decision on any deference to the DLSE position, but on their independent analysis of the wording, history, and apparent intent of the Legislature when enacting Labor Code section 226.7 and the Industrial Welfare Commission when they promulgated the wage order. 

Based on the reasoning above, the Court concluded,  “[t]hat the payment imposed for impermissibly failing to provide a meal or rest break is a penalty.  As a penalty, it had to be raised within one year of the last date that the claim accrued.”   

IMPACT ON EMPLOYERS

The Court’s ruling in Murphy may leave employers thinking that the holiday season is off to a great start.  However, this decision is not final yet, and not binding on other courts of appeal.  Plaintiff’s lawyers, particularly those wrapped up in class action lawsuits, can be expected to seek to disregard the Court’s holding.

Employers should make sure that their employees are properly classified as exempt or non-exempt.  They should review their policies regarding meal and rest breaks, remind employees to take their breaks, and to notify management or their human resources director if they are unable to take these breaks. 

This article was prepared by Monica Sanchez  , who is an associate at Kring & Chung, LLP’s Irvine and San Diego office. You can reach Ms. Sanchez at msanchez@kringandchung.com  or at (949) 261-7700.

** The information contained herein is for informational purposes only and should not be relied upon in reaching a conclusion in a particular area. The legal principles discussed herein were accurate at the time this article was authored but are subject to change with time. Applicability of these same legal principles may differ substantially in individual situations. Please consult an attorney before making a decision in a particular area using only the information provided in this article.

Kring & Chung, LLP is one of California’s fastest growing full-service law firms. With over forty attorneys, the firm practices business and corporate matters, construction, real estate, labor & employment, insurance, estate planning and family law. The employment department of the firm serves the businesses and individuals offering a wide range of services including:  employment consulting, employee handbooks, wrongful termination, discrimination litigation and more.

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