On Wednesday, Governor Schwarzenegger signed into law a bill that makes it significantly easier for temporary staffing agencies to pay their employees without the threat of onerous “waiting time” penalties. The new law allows temporary agencies to pay employees on a weekly basis, rather than on the day each project ends, thereby avoiding potentially harsh penalties for the late payment of “final wages” under California Labor Code Sections 201 and 202. 

The new law adds Section 201.3 to the Labor Code, and provides guidance on how temporary workers must be paid. With a few exceptions discussed below, Section 201.3 now allows temporary staffing agencies to pay employees on a weekly basis regardless of when each temporary assignment ends. Upon completion of an assignment, temporary employees may now be paid on the regular payday of the following calendar week, and a temporary agency employer “shall be deemed to have timely paid wages” to such employees if payment is made in compliance with Section 201.3.

The new law offers much-needed relief to temporary agencies, given the strict requirements arguably imposed by the California Supreme Court in Smith v. Superior Court, 39 Cal.4th 77 (2006), sometimes referred to as the L’Oreal decision. In L’Oreal, the California Supreme Court held that a temporary hair model who was employed for one-day assignments was “discharged” within the meaning of the Labor Code at the conclusion of every assignment, whether or not the model remained on staff with the agency for future modeling projects.

Since the Labor Code generally requires “discharged” employees to be paid all accrued but unpaid wages on their last day of work, the L’Oreal decision could be interpreted to mean that all temporary employees must be paid no later than the day their assigned project ends. This reading conflicted with the common practice of many temporary staffing agencies, which pay temporary workers on a weekly basis, regardless of when any individual project ends. Although the scope of the L’Oreal decision was unclear, it arguably left temporary agencies in the untenable position of needing to pay employees whenever a project ended, even when clients made “day-of” decisions to end projects, giving the temporary agencies no notice and no opportunity to pay employees assigned to the projects.

Given the seemingly harsh result of the L’Oreal opinion, last year the American Staffing Association, California Staffing Professionals and other temporary agencies sponsored a bill to clarify the law. Similar to the current law, Assembly Bill 1710 proposed the addition of a section to the Labor Code that would allow temporary staffing agencies to pay employees on a weekly basis without violation of the final wage rules.

While Assembly Bill 1710 received overwhelming bi-partisan support and was passed by both the state Assembly and Senate, Governor Schwarzenegger ultimately vetoed the bill because it also included a provision providing for joint and several liability for workers’ compensation claims filed by temporary employees. In his veto message, the governor made it clear that he approved of the temporary staffing portion of the bill, leaving proponents of the bill hopeful that Section 201.3 could be reintroduced and signed into law. That hope was realized this week when the Governor signed Section 201.3 into law.

Section 201.3 has some important exceptions. First, temporary employees still must be paid daily if they work on a day-to-day basis or if they are providing services for a client engaged in a trade dispute. The weekly pay period rule also may not apply to employees who are assigned to a company for over 90 consecutive calendar days. And temporary employees must be paid their final wages in the same fashion as any other employee (i.e., on the last day of work unless the employee quits with less than 72 hours notice) if the employee quits or is discharged by the temporary agency itself as opposed to a client of the agency.

While Section 201.3 gives temporary staffing agencies a way out from the L’Oreal decision, given the specific requirements imposed by Section 201.3, agencies would be well-advised to carefully comply with the new procedures. To avoid penalties under the Labor Code, agencies should ensure that temporary workers are paid on a weekly basis, unless subject to an exemption, and that workers are paid on the day of termination (or within 72 hours if the workers quit without notice). Failure to abide by the new requirements could result in substantial penalties pursuant to the Labor Code.