Why it matters

Affirming a trial court’s order to pay waiting time penalties to a class of employees, a California appellate panel determined that the penalties were due because the employer suspected the required wage had gone up but continued paying the old wage after halfheartedly investigating its suspicions and later made an unreasonable argument that the wage law is unconstitutionally vague. Sandra Diaz and other employees sued Grill Concepts for underpayment of wages and then sought “waiting time” penalties. A trial court judge agreed and ordered $268,758.71 in penalties. The employer appealed. The appellate panel affirmed, holding that Grill Concepts’ underpayment of wages was “willful” because the employer suspected the required wage had gone up but kept paying the old wage, making minimal effort to look into whether a raise was required, and then attempted an unreasonable argument that the wage law was unconstitutionally vague. In addition, the court held that trial courts do not have discretion on equitable grounds to relieve an employer from having to pay waiting time penalties.

Detailed discussion

In April 2010, Grill Concepts opened a Daily Grill restaurant within the Westin Hotel near the Los Angeles International Airport. Over the next four years, the company employed approximately 200 people in various roles, 83 of whom quit or were fired by June 2014.

The restaurant was located within the Airport Hospitality Enhancement Zone designated by the city of Los Angeles, created in 2007. The ordinance creating the Zone required “Hotel Employers” to pay “Hotel Workers” a “living wage” that was higher than the minimum wage required by state law. The restaurant’s employees were included among those who received the higher wage. In 2010, the ordinance was amended to require that annual adjustments to the living wage be made on July 1 of each year, keyed to the annual increase in retirement benefits paid to members of the Los Angeles City Employees Retirement System that would be set forth in a bulletin promulgated each year by the city’s Bureau of Contract Administration.

Between 2010 and 2014, Grill Concepts paid its workers the living wage prescribed by the original ordinance, even after the amendment went into effect. The company’s human resources director raised concerns that the restaurant might be underpaying its employees in June 2010 and contacted outside counsel. The attorney learned the amendment was “in process,” but neither outside counsel nor the HR director ever followed up.

Three restaurant employees filed suit in June 2014 on behalf of a class of current and former restaurant employees for the restaurant’s failure to pay the living wage required by the 2010 amendment as well as “waiting time” penalties. Grill Concepts responded by cutting checks to all former and current employees for the full amount of underpayment within eight weeks.

The parties then filed cross motions for summary judgment on whether Grill Concepts was liable for waiting time penalties. The trial court determined that the ordinance was not unconstitutionally vague and that the employer owed the penalties because its failure to pay was “willful” within the meaning of Labor Code Section 203. After ruling that it did not have the discretion to waive the waiting time penalties for equitable reasons, the trial court ordered Grill Concepts to pay $268,758.71. The employer appealed.

Labor Code Section 203 empowers a court to award “an employee who is discharged or who quits” a penalty equal to up to 30 days’ worth of the employee’s wages “[i]f an employer willfully fails to pay” the employee his full wages immediately (if discharged) or within 72 hours (if he or she quits). Because employees are made to wait for their final paycheck, the penalty is known as the “waiting time” penalty.

Grill Concepts told the appellate panel that it did not act willfully in failing to pay those plaintiffs who quit or were fired before June 2014 the proper amount on their final paycheck because the underpayment was not deliberate and the ordinance is so confusing to apply that the mistake was innocent rather than willful.

The Labor Code defines a “willful failure to pay wages” as occurring “when an employer intentionally fails to pay wages to an employee when those wages are due.” Under this definition, an employer’s failure to pay is not willful if that failure is due to uncertainty in the law, the court noted, or even a good faith mistaken belief.

“Ignorance of the law is no excuse,” the panel wrote. “A closely related corollary is that citizens have a ‘duty of inquiry to determine’ ‘whether a contemplated course of conduct is within a statutory prohibition.’ Here, Grill Concepts’ ignorance of the amended ordinance was ‘coupled with [its] negligence in failing to look it up.’ The undisputed facts show that Grill Concepts suspected it was underpaying its employees and went so far as to confirm that the living wage law was in the midst of being amended but then did nothing else.”

The employer did not follow up with the city attorney’s office, perform any further legal research, or ask any other hotelier or restaurateur in the Zone what living wage they were paying, the court said.

“The trial court summed it up best when it noted that Grill Concepts ‘failed to follow through properly on its investigation of where to find the governing statute’ and that its efforts were ‘below the standard of care,’” the panel added. “Accordingly, Grill Concepts’ inability to locate the amended ordinance does not preclude the finding that its failure to pay was willful.”

Nor was the court persuaded by the employer’s contention that the ordinance was unconstitutionally vague. “The amended living wage ordinance is not vague because it is possible to give it a ‘reasonable and practical construction,’” the court said, and a person of ordinary intelligence would understand the need to increase the living wage by the amount set forth in the Bureau of Contract Administration’s annual bulletin.

The court reiterated that no evidence was presented that any of the other hotels or restaurants in the Zone “had difficulty locating the agency’s bulletin within [the time] window each year.”

Finally, the appellate panel rejected the employer’s argument that trial courts have the discretion to waive or reduce waiting time penalties. The plain text of the statute declares that “the wages of the employee shall continue as a penalty” for up to 30 days, and elsewhere the Labor Code provides that throughout the code, “[s]hall is mandatory.”

Finding it unambiguous, the court said the analysis began and ended with the text, refusing to disregard the legislature’s decision not to provide for judicial discretion. “Were we to recognize a trial court’s equitable discretion to except an employer from a waiting time penalty on equitable grounds unconnected to whether the failure to pay was willful, we would be impermissibly creating an exception to the penalty for willful violations,” the panel wrote. “This is not something we are allowed to do.”

Further, making the penalty optional “means it will not always be applied and, more to the point, means it will likely be litigated in every case; the very existence of such an escape valve reduces employers’ incentive to comply and thereby undercuts the very purpose of the penalty. We will not construe a statute in a way that undermines its purpose.”

To read the opinion in Diaz v. Grill Concepts Services, Inc., click here.