As of today, there are five cases pending in the Supreme Court with the issue of the penalty/wage distinction in Labor Code section 226.7. The lead case is Murphy v. Kenneth Cole Productions, Supreme Court Case No. S140308. The others are on hold pending the resolution of the lead case.
- S140303 Murphy v. Kenneth Cole Productions, Inc.
The First District, Division 1, (San Francisco) justices Marchiano, Swager, and Marguiles, held that section 226.7 imposes penalties. Though this court refers to the legislative history, the touchstone of the decision is that, because employer lack discretion to prohibit meal and rest periods [Note: That's not entirely correct, is it?] that it is not compensation.
- S141278 National Steel & Shipbuilding v. Sup. Ct. (Godinez).
The Fourth District, Division 1 (San Diego), justices McIntyre and McConnell, with justice Irion in dissent held that section 226.7 is a wage (and a penalty). This court held that while the legislature hinted at this being a penalty, there are other factors that indicate this is a wage. First, it is self-executing, as opposed to penalties, which are not vested until enforced. Looking at the over-arching statutory "scheme" that section 226.7 is a part of, the court found that this is a statutory remedy that is not a penalty, because section 558 is, and it's unlikely there would be two penalties for one violation. (And in doing so rejects the DLSE's interpretation that section 558 does not apply to rest and meal period violations.) Furthermore, the court said, the fact that the Legislature did not explicitly call the section 226.7 remedy a penalty suggests that they didn't intend the one-year statute to apply.
- S141711 Mills v. Sup. Ct. (Bed, Bath & Beyond).
The Second District, Division 5 (LA), Justices Armstrong, Turner, and R. Mosk, held that section 226.7 imposes a penalty on the employer. This court held that the section was ambiguous on its face because the use of the word "pay" was enough to cloud the issue. The court goes on to rely on the legislative history and the incongruity of section 226.7's language with other uses of wages to reject the wage thesis. The fact that the penalty isn't large enough to deter the action [?!] and the federal Tomlinson opinion were rejected.
- S142600 Chalecki v. Sup. Ct. (State Farm).
No opinion was issued in this case. The writ petition was denied in the Court of Appeal, but review was granted in the Supreme Court.
- S144949 Banda v. Richard Bagdasarian, Inc.
In an unpublished opinion, the Fourth District, Division 2 (Riverside), Justices McKinster, Richli, and Gaut held that section 226.7 is a penalty. This court also relied heavily on the legislative history, but did not engage in as deep of an analysis as others, and said that they were going with the majority of judges. Correctly, I think, they found that the legislative history isn't that revealing, other than the assembly referred to it as a "penalty." [Note: can the Floor Analyst be deemed to be an expert on wage and hour law? Need she/he be so?] Ultimately, this court looked at the rationale for the imposing the penalty, and found that it doesn't bear any relationship to the detriment an employee might suffer.
Remember, under California stare decisis rules, trial courts are at liberty to follow the reasoning of any of the published opinions. At this point, pursuant to CRC 8.1105(d), none of these are live, published opinions, however. That being the case, there's not much to guide trial court judges at this point. (The DLSE opinion is still live, however. Under the APA, though, quasi-judicial opinions are the lowest on the totem-pole. The proposed regs would have been better, quasi-legislative meat.)
Despite the fact that the majority of courts and judges have held (almost dismissively) that section 226.7 creates a penalty, the arguments in National Steel are not trivial, and do not stand thoroughly refuted in other Court of Appeal opinions. This could make for an interesting result from the Supreme Court.
The federal courts have also issued two new opinions on this matter.
- Corder v. Houston's Restaurants, Inc., 424 F.Supp.3d 1205 (C.D.Cal., 2006)
Judge Carney relying on Mills and, specifically Justice Mosk's concurrence holding that because employers have no discretion to deny rest breaks and meal periods, and, furthermore, because the remedy does not replace the wages that would still be owed if the employee did work through those breaks, the payment is a penalty. [Note: This is along the lines of overtime, (i.e., the Tomlinson rationale) another analogy not strongly enough disposed of in other opinions.]
- Pulido v. Coca-Cola Enterprises, Inc., 2006 WL 1699328 (Unpublished). Judge Phillips held that section 226.7 institutes a penalty. Central to this court's holding was that "It is scarcely logical to classify the statutory damages as a wage when a court need not examine the actual amount of time worked by the employee." Otherwise, this opinion doesn't break much new ground, but hashes over the other cases well.
At the end of the day, many of the courts were at least partially persuaded by the DLSE's quasi-judicial opinion holding that section 226.7 calls for penalties. I have not had the same luck using that authority in trial courts, and I agree with the National Steel Court that the DLSE's opinion isn't binding on the courts, but their expertise (of course, this was a politically-motivated decision pushed by the Schwarzenegger administration upon their arrival) carries weight.
No one can say for sure what the Supreme Court will do with this. My sense is that they probably will agree with the Kenneth Cole court and find that 226.7 is a penalty, but I wouldn't exactly bet on that until some force is applied to the arguments that still make some sense, as advanced by the National Steel court and the old Tomlinson court. There may or may not be a deep, pervasive authority or framework that overcomes these rationales with more than a mere denial.
Furthermore, some of the arguments on the pro-penalty side are based on incorrect assumptions, which have been recited by subsequent courts. Starting with Murphy, you can trace a line of cases relying on the theory that employers lack discretion to keep employees from taking rest and meal breaks. There are, in fact, conditions where employers can ask for on-duty meal periods (which are then compensated, adding yet another wrinkle). Furthermore, rest periods are paid. Therefore, discretionary or not, there is some weight to the pro-premium argument.
I will look forward to reading the voluminous briefing filed on this case by the parties and and the amici curiae to see if they've found it. Richard Simmons (not that one), the author of the Wage & Hour Manual For California Employers has signed on as counsel for several amici curiae. He is an expert, even if he can be somewhat shrill from time to time, and I look forward to reading his papers.
As of now, I am skeptical of the Supreme Court's ability to be expert in every field of law. That being the case, I expect them to rely more heavily on the legislative history and "Mosk" rationale, and the fact that only two out of twelve Court of Appeal judges and one out of three federal judges have found the pro-premium side persuasive than the arcane origins of wage premia.
As for me? I don't think the statute is ambiguous. I think it calls for a penalty, using the rate of pay as a measure only.
UPDATE: Interesting tid-bit. The IRS calls these wages.
UPDATE 2: Thanks to Robert Tollen and his secretary Kathy at Seyfarth Shaw for sending me copies of their briefing in the Kenneth Cole matter. I will take a look at them and tell you what I think. So far, they're quite good.
UPDATE 3: I this the argument that kills the OT analogy?
Suppose, however, that one day an employer provides an employee no breaks, but allows the employee to go home an hour earlier, and so the employee engages in no extra labor. * * * Suppose, conversely, an employee who is denied a break becomes ill or suffers an injury as a result. An hour of pay would not compensate for those damages.
Ans. Brief of Opp. Pty. at 9 (Aug. 21, 2006). Perhaps. It all depends on whether we accept those rare cases as logically eliminating the possibility of a legislative judgment on the amount of reward. (The second argument is slightly undermined by the presence of workers' compensation.) Despite that, I think this clearly shows how it is different from OT in its essence, if not in its usual effect.