New Developments in Waiting Time Penalties

The California Labor Code mandates that, when an employee is terminated or resigns from employment, his or her final wages are generally due and payable immediately. Labor Code Section 203 also provides that, if an employer willfully fails to pay timely final wages, those wages continue as a penalty from the due date until they are paid or until an action is commenced to recover the wages, but shall not continue for more than 30 days. As such, if an employer fails to pay final wages upon an employee's resignation or termination, it could be subject to a lawsuit to recover not only the unpaid final wages, but also penalties arising from those unpaid wages. If an employer does pay final wages, but is not timely in making the payment, it could nevertheless be subject to a lawsuit to recover penalties arising from the late payment.

In Pineda v. Bank of America, the state Supreme Court considered whether an employee's action to recover only waiting time penalties under Section 203 (as opposed to unpaid final wages and waiting time penalties) is governed by a one-year or three-year statute of limitations - the period of time within which an action must be initiated. Bank of America was Jorge Pineda's former employer. On May 11, 2006, he gave two week's notice of his resignation. Bank of America did not pay Pineda his final wages on his last day of employment, but paid them four days later.

On Oct. 27, 2007, well over one year after Pineda's last day of employment, he initiated a lawsuit seeking to represent a class of former Bank of America employees whose final wages had not been timely paid. He claimed that the bank failed to pay final wages as required by the Labor Code, and sought penalties pursuant to Section 203. He also alleged that the bank's delinquent payment of final wages violated California's unfair-competition law and sought restitution of unpaid Section 203 penalties. The unfair-competition law prohibits any unlawful, unfair or fraudulent business act or practice and authorizes private individuals to sue to seek injunctive relief or restitution. When courts order restitution, the goal is to restore a plaintiff to his or her status before the wrongdoing.

The trial court found that a one-year statute of limitations governs when, as in this case, an employee seeks only Section 203 penalties (as opposed to unpaid wages and Section 203 penalties). Since the trial court found that Pineda's action was governed by a one-year limitations period, he had failed to initiate a timely action against the bank. It also held that Section 203 penalties are not recoverable as restitution under the unfair-competition law. As such, it granted the bank's motion for judgment on the pleadings. The Court of Appeal affirmed and the state Supreme Court granted review.

The Supreme Court began its analysis by looking to the plain language of the applicable statutes. Labor Code Section 203(a) states: "[i]f an employer willfully fails to pay, without abatement or reduction...any wages of an employee who is discharged or who quits, the wages of the employee shall continue as a penalty from the due date thereof at the same rate until paid or until an action therefore is commenced, but the wages shall not continue for more than 30 days." The California Code of Civil Procedure provides for a one year statute of limitations for "[a]n action upon a statute for a penalty[.]" Thus, the Court acknowledged that, if Section 203(a) comprised the entire statute, a one-year statute of limitations would undoubtedly govern any action to recover the Section 203 penalties.

This longer limitations period increases the potential exposure for waiting time penalties resulting from an employer's failure to pay timely final wages.

However, another section of the Code of Civil Procedure authorizes the Legislature to prescribe a different statute of limitations for some civil actions. To that end, Section 203(b) of the Labor Code provides that "[s]uit may be filed for [Section 203] penalties at any time before the expiration of the statute of limitations on an action for the wages from which the penalties arise." An action to recover unpaid final wages is governed by another section of the Code of Civil Procedure, which provides for a three-year statute of limitations.

According to the state Supreme Court, it is undisputed that, when an employee sues a former employer to recover unpaid wages and Section 203 penalties, the three-year statute of limitations applies. The issue in this case, however, was that Bank of America had already paid Pineda his final wages, albeit four days late. Pineda thus sued the bank for the Section 203 penalties only. The bank argued that, because there was no "action for the wages from which the penalties arise," Section 203(b) was inapplicable and thus a one-year statute of limitations applied.

The Court, however, concluded that Bank of America's interpretation of Section 203 was unreasonable. It concluded that the Legislature intended to ensure that the statute of limitations for an action for Section 203 penalties tracked the statute of limitations for actions to recover unpaid final wages. The Court explained that in doing so, employees would not have to face different limitations periods for commencing actions that arise out of the same facts. The Court viewed the statutory language of Section 203 as unambiguous, and thus concluded that the three-year statute of limitations period governs all actions for Section 203 penalties, regardless of whether such an action is accompanied by a claim to recover unpaid final wages themselves. The Court further explained that such an interpretation was consistent with the well-established public policy in favor of the complete and prompt payment of final wages to employees and that a longer limitations period would incentivize employers to pay final wages on a timely basis.

The Court next considered whether Pineda could recover Section 203 penalties as restitution under the unfair-competition law. It had previously held that unpaid overtime wages were recoverable as restitution via the unfair-competition law because, once earned, the unpaid overtime wages constituted property to which the employee was entitled. Here, however, employees do not have any ownership interest in Section 203 penalties, which are not intended to compensate employees for work performed. While the employee's work results in a vested interest in unpaid wages, an employer's action (or inaction) results in Section 203 penalties. Employees therefore do not have any vested interest in Section 203 penalties, which are based on an employer's conduct. Accordingly, the Court held that such penalties cannot be recovered as restitution under the unfair-competition law. The Court thus remanded the matter for further proceedings consistent with its decision.

This case serves to clarify the limitations period for Section 203 waiting time penalties, which was addressed in McCoy v. Superior Court (Kimco). In McCoy, the Court of Appeal held that, where an employee sought Section 203 waiting time penalties only, a one-year statute of limitations governs. In Pineda, the state Supreme Court expressly disapproved McCoy and clarified that Section 203 provides for a single, three-year limitations period that governs all actions for Section 203 penalties. This longer limitations period increases the potential exposure for waiting time penalties resulting from an employer's failure to pay timely final wages. As such, it is even more important that employers audit and adhere to their final pay practices to ensure compliance with the California Labor Code.

Grace Chan is an attorney with the labor and employment law firm of Liebert Cassidy Whitmore, in its San Francisco office. She can be reached at (415) 512-3000 or at gchan@lcwlegal.com.

Reprinted and/or posted with the permission of Daily Journal Corp. (2010).