Seyfarth Shaw LLP | www.seyfarth.com Litigating CA Wage & Hour Class and PAGA Actions (23rd Edition) 45 B. Debate Over Whether One-Hour Payment Is a “Penalty” Labor Code section 226.7, which went into effect January 1, 2001, requires any employer who fails to provide meal or rest periods as required by the governing Wage Order, to pay the employee one hour of pay at the employee’s “regular rate of compensation.” From the enactment of Section 226.7 until the California Supreme Court resolved the issue against employers in 2007, the most hotly disputed issue within the meal and rest period cases was whether the one hour of pay required by Section 226.7 is a penalty or a compensatory wage. Although the question of whether the payment constitutes a penalty or a wage may seem arcane, construing the payment as a penalty would drastically reduce the employer’s exposure for a meal period class action— sometimes by more than 75 percent—for the following reasons: • The statute of limitations would be reduced to one year only.229 • The penalties could not be recovered under the Unfair Competition Law, thus precluding using the UCL to extend the statute of limitations to four years.230 • Waiting time penalty liability could not arise from meal period violations, as such penalties only arise from failure to pay wages.231 • Arguably, no additional $100-per-pay-period penalty would be recoverable under the Labor Code Private Attorneys General Act of 2004 (“PAGA”).232 • The employee would not be entitled to prejudgment interest under Labor Code section 218.6.233 In 2007, in a decision that surprised many in the wage and hour community, Murphy v. Kenneth Cole, the California Supreme Court held unanimously that Section 226.7 provides for “a wage or premium pay” rather than a penalty.234 Although the decision definitively decided that the statute of limitations on a Section 226.7 claim is three years, the decision left open several other issues. First, does premium pay under Section 226.7 constitute restitution 229 Compare Code Civ. Pro. § 340 (one-year statute for penalty claims) with Code Civ. Pro. § 338(a) (three-year statute for an action upon a claim of liability created by a statute other than a penalty or forfeiture). 230 See Cel-Tech Communications, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163, 179 (1999) (plaintiff may not recover penalty of “treble damages” through UCL action); Bus. & Prof. Code § 17206 (penalties recoverable only in action brought by the actual attorney general). 231 Lab. Code § 203 (penalties recovered for failure to pay promptly all wages owed to employees who quit or are discharged). 232 Lab. Code § 2698, et seq., discussed below in Section XIII. But see Caliber Bodyworks v. Superior Court, 134 Cal. App. 4th 365, 377 (2005) (suggesting that penalties recoverable by individuals independent of PAGA are not civil penalties, which would allow recovery of a separate civil penalty for violations of Labor Code section 226.7 even if the one-hour-ofpay requirement is a penalty). 233 Cf. Lab. Code § 218.6 (statutory pre-judgment interest recoverable in action for wages). 234 Murphy v. Kenneth Cole Prods., 40 Cal. 4th 1094 (2007).
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