On November 18, 2010, in Pineda v. Bank of America, N.A., the California Supreme Court issued an opinion deciding two questions relating to Labor Code section 203 penalties for late payment of final wages: (1) whether a one-year (as opposed to a three-year) statute of limitations applies in the absence of a claim for unpaid final wages; and (2) whether section 203 penalties are recoverable as restitution under California’s Unfair Competition Law (“UCL”), Business and Professions Code section 17200 et seq., meaning a four-year statute of limitations would apply.

The Court answered both questions “no,” allowing a three-year statute of limitations for the recovery of penalties even when final wages have been fully paid, but rejecting a potential four-year statute of limitations under the UCL.

The Lawsuit and Lower Court Rulings

Plaintiff Pineda provided his employer Bank of America two weeks’ notice that his last day of work would be May 11, 2006. Bank of America did not pay Pineda his final wages until May 15, 2006, four days after his final day of work.

Pineda filed a complaint against Bank of America seeking to represent a class of former employees, asserting two causes of action: (1) failure to timely pay final wages under Labor Code sections 201 and 202 and seeking waiting-time penalties under section 203; and (2) failure to timely pay wages under the UCL and seeking “restitution” in the form of unpaid section 203 penalties.

The trial court granted Bank of America’s motion for judgment on the pleadings, concluding that Pineda’s first claim was barred by a one-year statute of limitations for “a penalty” that applies when an employee files an action seeking only section 203 penalties, but not unpaid wages. The trial court also held that section 203 penalties are not recoverable as restitution under the UCL. The Court of Appeal affirmed the trial court’s ruling.

The Supreme Court’s Decision

Statute of Limitations for Actions Seeking Section 203 Penalties

Under Labor Code section 203(b), an action for waiting time penalties may be brought “at any time before the expiration of the statute of limitations on an action for the wages from which the penalties arise.” A statutory claim for wages is governed by the three-year statute of limitations in Code of Civil Procedure section 338.

The parties did not dispute that section 203(b)’s three-year statute of limitations applied to all actions where both unpaid final wages and section 203 penalties were sought. However, Bank of America argued that the one-year statute of limitations in Code of Civil Procedure section 340(a) for “[a]n action upon a statute for a penalty or forfeiture” should apply to actions for section 203 penalties alone, when final wages have been paid.

The Court disagreed, finding that the legislature intended that the statute of limitations specified in section 203(b) for actions to recover section 203 penalties must be the same as the statute of limitations for unpaid final wages, to ensure that employees are not faced with different limitations periods for claims arising out of the same underlying facts.

The Court also expressed concern over the public policy ramifications of Bank of America’s position, because it would allow for inconsistent results where the statute of limitations on an employee’s section 203 claim would vary depending on when the employer paid the final wages. For example, if an employer waited a year before paying final wages, under Bank of America’s argument, waiting-time penalties could be avoided as time-barred. In contrast, an employee who was paid six months late would still have six months to bring suit for penalties associated with the late payment. Finally, the Court reasoned that the longer statute of limitations served the public policy of incentivizing prompt payment of final wages.

Section 203 Penalties Are Not “Restitution” Under the UCL

The UCL prohibits “any unlawful, unfair or fraudulent business act or practice,” which includes non-payment of wages to employees. Private individuals’ remedies under the UCL are “generally limited to injunctive relief and restitution.” Here, Pineda argued that section 203 penalties were “restitution” and should therefore be recoverable under the UCL, which carries a four-year statute of limitations. Significantly, the UCL’s four-year statute of limitations would have allowed Pineda to maintain his claim even if the Court otherwise held the section 203 claim was subject to a one-year statute of limitations.

The Court rejected Pineda’s argument, finding that section 203 penalties were not intended to compensate employees for work performed. Rather, section 203 penalties were designed to encourage employers to pay final wages on time and punish those who did not. Employees have no vested interest in section 203 penalties until the penalties are awarded by an adjudicative body. As such, the Court found section 203 penalties do not qualify as restitution under the UCL.

What Pineda Means for Employers

Employers that systematically fail to pay final wages on time, even if only a few days late, are now subject to significantly increased class liability for waiting time penalties under section 203, as the class period now may extend back three years instead of one year. Employers should continue to make best efforts to ensure that all final wages are timely paid in accordance with Labor Code sections 201 and 202.