California Wage and Hour Issues, Quirky Question # 128

Quirky Question # 128:

I work for a California employer with nonexempt retail employees who earn commissions on their sales.  We have been sued for failing to provide our employees with meal and rest breaks.  I understand the company may be liable to each employee for one hour of pay when a break was not provided.  The class action complaint against us, however, alleges the one hour of pay is based on each employee’s rate after incorporating his/her earned commissions, and that for days in which a missed meal and rest break occurred, the employee is owed two hours of pay.  Is that correct?

Dorsey’s Analysis:

California wage and hour litigation is a growth industry right now. Like you, employers are more frequently becoming defendants in class actions alleging violations of California’s complicated and restrictive wage and hour laws. Notwithstanding the volume of litigation, however, many fundamental questions about how California’s Labor Code applies remain unanswered. You present two such questions. While California courts have largely yet to provide direct answers to your questions, an analysis of the Labor Code and the relevant cases that do exist provides a good indication of where courts might come down.

Let’s first tackle the question about double recovery for meal and rest period violations. The complaint against you alleges your employees are entitled to one hour of wages for each meal period violation and, in addition, one hour of wages for each rest break violation, even when those violations occur on the same day. There does not appear to be any direct support under California state law for this request. To the contrary, the statutory language and assumptions made by the courts appears to support an argument that only one hour of pay is due for each day, regardless the violations.

The controlling statute regarding the provision of meal and rest periods in California provides, in relevant part:

If an employer fails to provide an employee a meal period or rest period in accordance with an applicable order of the Industrial Welfare Commission, the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each work day that the meal or rest period is not provided.

Cal. Labor Code § 226.7(b) (emphasis added). The statute suggests the one hour of additional wages is calculated not by counting the number of meal period violations and number of rest period violations; rather, it is calculated by counting the number of work days on which some violation occurs. Thus, under the terms of the statute, multiple violations in a single day (e.g., being denied both a morning and afternoon rest period, or both a rest period and a meal period) arguably should result in only one additional hour of compensation for the employee.

California courts, however, have not expressly endorsed this conclusion. But, the California Supreme Court appears to accept this analysis. In Murphy v. Kenneth Cole Prods., Inc., 40 Cal. 4th 1094, 1112 (2007), the court determined that the one hour of pay provided in § 226.7(b) constituted a wage, not a penalty, for purposes of determining the applicable statute of limitations. As part of its discussion, the court summarized the defendant’s argument that the additional hour of pay was a penalty “because it is imposed without reference to actual damage, since an hour of pay is owed whether the employee has missed an unpaid 30-minute meal period, two paid 10-minute rest periods, or some combination thereof.” Id. at 1112. The Murphy court did not question the foundation for the defendant’s argument; rather, it held the statute establishes a set amount of compensation because damages are obscure and difficult to prove. Id. at 1113-14.

The California Supreme Court recently reaffirmed this assumption. In Arias v. Superior Court, 46 Cal. 4th 969, 987 (2009), the court cited Murphy for the proposition that the remedy for a § 226.7 violation is “one additional hour of pay.” Federal courts also appear to be in agreement. See Thomas v. Home Depot USA Inc., 527 F. Supp. 2d 1003, 1008 (N.D. Cal. 2007) (stating that Labor Code § 226.7 “provides for an additional hour of pay for each day that an employer fails to provide an employee a meal or rest period”); Corder v. Houston’s Rests., Inc., 424 F. Supp. 2d 1205, 1207 (C.D. Cal. 2006) (stating that “the plain wording of [§ 226.7] is clear that an employer is liable per work day, rather than per break not provided”).

There is some contrary authority, though upon close analysis, it does not appear sound. In a federal decision from the Central District of California, Marlo v. United Parcel Service, Inc., 2009 WL 1258491, at *6-7 (C.D. Cal. May 5, 2009), the court held that one hour of pay was due both for rest break and meal break violations, even when those violations occurred on the same work day. The court’s sole reason for its holding was that liability per work day rather that per violation would create the incentive for employers to require an employee who has missed a ten-minute morning rest break to also miss the lunch period. The court then went on to hold that, under its interpretation, “if more than one rest period violation occurs in a single work day but no meal period violations occur, [an employee] may only recover one additional hour of pay for all of the rest period violations combined; likewise, if more than one meal period violation occurs in a single work day but no rest period violations occur on that day, [an employee] may only recover one additional hour of pay for all of the meal period violations combined.” Id. at *7.

Strangely, this holding is directly contrary to the rationale the court used to justify its per violation rather that per work day interpretation. That is, if an employer would be encouraged to require an employee who has missed a ten-minute morning rest break also to miss the lunch period, the employer would have just as much incentive to force that employee to miss subsequent rest periods. But under the court’s rule, two missed rest periods results in one additional hour of pay. Based on this analytical flaw, I would argue a plaintiff’s attorney would have a difficult time relying on Marlo over the other authorities cited above to request multiple hours of wages for days on which meal and rest periods were not provided.

So, let’s assume one additional hour of pay is owed for each work day a violation occurs. Your next question, to which we now turn, asks what rate of pay applies to this additional hour of pay. The complaint against you claims the hour of pay must include not only the employee’s straight time hourly compensation, but also a pro-rated amount accounting for the employee’s other earnings during the relevant pay period, including commissions, bonuses, and spiffs. The claim essentially is that the additional hour of pay should be based on the employee’s “regular rate of pay,” the rate used for calculation of overtime compensation. Like your other question, there is little direct authority on point. I believe, however, a good argument can be made that the straight time rate, not the regular rate, should be used.

Again, the meal and rest period statute provides, in relevant part:

If an employer fails to provide an employee a meal period or rest period in accordance with an applicable order of the Industrial Welfare Commission, the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each work day that the meal or rest period is not provided.

Cal. Labor Code § 226.7(b) (emphasis added).

The statute does not define “regular rate of compensation.” Plaintiff appears to believe the “regular rate of pay” definition used for purposes of calculating overtime premium pay, see Labor Code § 510(a), which may include certain bonuses or commissions, also applies to the “regular rate of compensation” used to determine meal and rest break violation compensation. I do not believe this is supportable.

Although “regular rate of pay” is not defined in the Labor Code, it is a defined term by adoption of the Federal “regular rate” definition found at 29 U.S.C. § 207(e). See DLSE Enforcement Manual § 49.1.2. The California Legislature chose not to use that same term for purposes of meal and rest break violations. One must assume the Legislature chooses the words in its enactments with purpose, and the fact “regular rate of compensation” is different than the defined term “regular rate of pay” must mean something.

The difference between the phrases flows from the different purposes of overtime premium pay, on one hand, and compensation due for meal or rest break violations, on the other. For the former, the money is designed to pay an employee for time spent working longer than a statutory maximum; the premium pay is based directly on the money the employee actually earned during the actual work time. See Murphy, 40 Cal. 4th 1109 (overtime’s “central purpose is to compensate employees for their time”). For the latter, however, the award is designed to compensate an employee for time the employee had a right not to work. See id. at 1103-04. Because it is meant to compensate non-working time, the compensation is not tied to any tangible money the employee actually earned during that time – because there is no corresponding time worked.

I admit this is a technical distinction, but one I think is valid. Thus, I would argue that any violations for meal or rest breaks should be compensated based on the employee’s straight time rate of compensation, not to include additional forms of pay that may be earned during actual work time, such as the commissions your retail employees may earn.

In the end, what your questions seem to highlight is the need for defense counsel to craft thoughtful arguments in what remains a heavily litigated, though as yet unsettled, area of law.