The California Supreme Court announced Monday its eagerly awaited decision in Murphy v. Kenneth Cole Productions (2007 Cal. LEXIS 3596 (S140308, April 16, 2007)). The key issue in the case is whether California’s statutory requirement that one hour’s worth of compensation be paid for each failure to provide a 30-minute meal period or a 10-minute rest period constitutes a wage payment governed by a three-year statute of limitations, or a penalty governed by a one-year statute of limitations. The California Supreme Court has ruled that the statutory requirement is a “premium wage” payment subject to a three-year statute of limitations. Prior to the Supreme Court’s decision, three of the four intermediate California appellate courts that addressed the issue had determined that the statutory provision was a “penalty” subject to a one-year statute of limitations.

By way of background, in California, each non-exempt employee who works more than five hours in a day is entitled to at least one unpaid 30-minute meal period. Each employee must also be authorized and permitted to take a 10-minute paid rest period for every four hours worked. Both statutory and regulatory law in California provide that, where such an employee is not provided a meal period or an opportunity to take a rest break, the employee is entitled to “one additional hour of pay at the employee’s regular rate of compensation.” Cal. Lab. Code §226.7. The heart of the dispute in Murphy was the applicable statute of limitations for the requirement that employers pay “one additional hour of pay” for each meal and rest period violation. Under California Code of Civil Procedure §338(a), the statute of limitations for a wage claim is three years, while the statute of limitations for a penalty claim is one year under California Code of Civil Procedure §340(a).

Employers argued that requiring employers to pay one hour of pay for missing a 30-minute meal period or even a 10-minute rest period made that payment a penalty. Employees argued, based largely on the legislative history of the statute, that that provision constituted a wage payment similar to the overtime premium wages.

The Supreme Court agreed with the employees’ position, holding that the legislative history supported the characterization of the one-hour payment requirement as a “wage.” In so holding, the court gave little weight to the State Labor Commissioner’s recent finding that the provision should be characterized as a “penalty,” dismissing the Labor Commissioner’s opinion as a political decision that contradicted its previous opinions.

The Supreme Court’s decision in Murphy v. Kenneth Cole could have a significant impact on employers in California. Numerous class actions are already pending in California, alleging violations of the meal period and rest period laws, and many more are being filed each day. The Kenneth Cole decision will in many cases increase the exposures beyond what employers may have expected, potentially as much as threefold. Further, this decision may serve as an incentive for employees and their counsel to file even more class actions alleging meal and rest period violations.

The Supreme Court also held in its Kenneth Cole opinion that, where the employer appeals a decision to the Superior Court following an administrative hearing before the State Labor Commissioner, an employee may raise new claims and issues not previously presented in the administrative hearing. California employers appealing a Labor Commissioner ruling already faced the prospect of paying the employee’s attorneys’ fees if the employee succeeded on the appeal. Employers now also face the prospect of defending against additional wage claims if they appeal a Labor Commissioner’s decision. This holding may chill employers’ appeals of Labor Commissioner rulings. That, in turn, may cause greater investment in hearings before the Labor Commissioner.