Is that one hour of additional pay employers owe employees who are not provided proper meal or rest periods a wage or a penalty? And why does it matter?

California Labor Code section 226.7(b), enacted in 2000, requires non-exempt employees to be paid one additional hour of pay at their regular rate for each workday they are not provided a meal or rest period in compliance with applicable wage orders. Since its enactment, the California Division of Labor Standards Enforcement and various courts of appeal have issued contradictory opinions as to whether the additional hour is a “wage” or a “penalty.” At stake in this seemingly esoteric argument is whether claims will be subject to a three-year statute of limitations applying to wages, or a one-year statute of limitations applying to penalties. The California Supreme Court, in a closely watched case, Murphy v. Kenneth Cole Productions, Inc., issued April 16, 2007, ruled that the additional hour constitutes a wage or premium pay and is therefore governed by a three-year statue of limitations, thus extending the time that employers may be liable to their employees for failure to provide required breaks. On a related issue, the court also held that a trial court hearing an appeal from the administrative process at the Labor Commission may consider additional but related wage claims not decided by the Commission.

The Kenneth Cole Case

Plaintiff John Murphy worked as a store manager in a Kenneth Cole Productions, Inc. (KCP) retail clothing store from June 2000 until June 19, 2002, during which time he was paid a weekly salary. Murphy regularly worked 9- to 10- hour days, during which he was only rarely able to take uninterrupted duty-free meal periods and almost never took a rest period. Murphy resigned and in October 2002 filed a wage claim asserting he should have been treated as a non-exempt employee and seeking unpaid overtime and waiting time penalties.

The Labor Commission found in Murphy’s favor and awarded unpaid overtime, interest, and waiting time penalties. KCP filed a notice for de novo review in the Superior Court, and Murphy, who now had legal representation, for the first time asserted claims for meal and rest period and itemized pay statement violations. The trial court agreed to hear the additional claims over KCP’s objections, and in addition to awarding overtime pay, interest and waiting time penalties, also ordered payments for missed meal and rest periods. In doing so, it applied a three-year statute of limitations and awarded payments for violations dating back to October 2000. Murphy was also awarded attorney’s fees and costs.

KCP appealed from this judgment. The Court of Appeal ruled that the missed meal and rest period payments constituted a “penalty” and applied a one-year statute of limitations, and also held that new claims that had not been heard before the Labor Commission could not be raised in a trial de novo in the Superior Court.

The California Supreme Court reversed on both counts. After examining the language of the statute and the administrative and legislative history, the court concluded that the additional hour of pay constitutes wages. This conclusion was buttressed by the court’s analysis that the additional hour of pay is meant to compensate the employee for his or her loss of free time and additional stress, but also serves to shape employer conduct in much the same way that premium pay for overtime, reporting time and split-shift pay does. Finally, the court also ruled that trial courts have the discretion to consider wage claims that while not previously considered by the Labor Commissioner, legally and factually flow from the same underlying wage dispute (in this case, whether Murphy was properly classified as an exempt employee).

Implications for Employers

Now that this issue has finally been decided, it is more important than ever for employers to take steps to ensure that they are properly adhering to California’s complicated wage and hour laws. Specifically:

  • Make sure your non-exempt employees are aware of their right to take legally mandated meal and rest periods.
  • Have and enforce a written policy that employees are not required to work during these times.
  • Keep all time records, including records of meal periods, for a minimum of three years so you have documentation in the event of a claim. If you don't utilize a time clock, implement a sign out/sign in procedure.
  • Be careful what you ask for. If you decide to appeal an unfavorable Labor Commission ruling, you may be subjecting yourself to additional claims, interest, and attorneys’ fees.