United States: Conflicting Appellate Court Decisions Concerning the Statute of Limitations for Meal and Rest Break Claims Presage California Supreme Court Review

On Friday, January 20, 2006, California's Fourth District Court of Appeal weighed in on the ongoing and high-profile controversy regarding whether the one-hour-of-pay remedy in California Labor Code section 226.7 for meal and rest period violations is a penalty or wages. In National Steel and Shipbuilding Co. (NASSCO) v. Superior Court (Case No. D046692), the Court of Appeal held that the payment is a "penalty against the employer in the form of a wage to the employee," and therefore subject to a three-year, rather than a one-year, statute of limitations. The Court of Appeal further ruled, without any extended analysis, that the remedy may be pursued as restitution under California Business and Professions Code section 17203. That statute offers a generous four-year statute of limitations.

Just last month, the First District Court of Appeal reached the opposite conclusion in the first published California state court case, Murphy v. Kenneth Cole Productions, Inc. (2005) 134 Cal. App. 4th 728. In Murphy, the Court held that the one-hour-of-pay is a penalty, not wages. On January 11, 2006, the plaintiff in the Murphy case filed a petition for review with the California Supreme Court. The Supreme Court has up to 90 days to rule on the petition. Review by the Supreme Court would appear to be likely in light of the clear conflict between the Murphy and NASSCO decisions. Further, on January 13, 2006, the California Department of Industrial Relations (DIR) announced that the Division of Labor Standards Enforcement (DLSE) will not file proposed regulations governing meal and rest periods with the Office of Administrative Law, but will begin a new rulemaking process at a later date. This announcement makes Supreme Court review even more likely. At least until the Supreme Court acts on the request for review, Murphy remains viable precedent; the NASSCO opinion will become final after 60 days.

Importantly, whereas the Murphy and NASSCO cases both turn on the question of the controlling statute of limitations for violations of section 226.7, meal and rest period claims implicate a host of other unsettled legal issues (e.g., the interplay between the meal and rest period regulations and the de minimis violation doctrine). Closely monitoring case law developments regarding these unsettled issues is an imperative for employers with operations in California and other jurisdictions with meal and rest period regulations.

NASSCO presented a narrow issue of statutory construction without any need for the Court of Appeal to consider the particular factual context. Indeed, no factual discussion of NASSCO's compliance measures is included in the Court of Appeal's opinion. Three employees filed a putative class action against NASSCO for meal and rest period violations. Early in the case, NASSCO moved to strike references in the plaintiffs' lawsuit to a time period more than one year prior to the date that suit was filed, arguing the one-hour-of-pay remedy in section 226.7 is a penalty with a one-year statute of limitations. The trial court denied the motion and NASSCO petitioned the Fourth District Court of Appeal for writ review.

The Court of Appeal first examined the statutory text and concluded that it was ambiguous with respect to whether the requisite payment is wages or a penalty. The Court of Appeal noted, for example, that the statute refers to "pay," but also that the payment is unrelated to the amount of time worked, "because an employee receives a full hour of pay for a missed 10 minute rest period or half-hour lunch period." Cal. Lab. Code § 226.7(b).

Next, the Court of Appeal considered extrinsic sources, principally (portions of) the legislative history. The Court of Appeal concluded that amendments to the original Assembly Bill (A.B. 2509) as it moved through the legislative process suggest the payment is wages rather than a penalty. The Court of Appeal noted in particular the Senate's decision to rewrite the proposed text so that it matched the corresponding Wage Order provisions in place at that time. But, the legislative history was unhelpful, the Court of Appeal noted, with regard to "how the Legislature viewed these changes [in the Assembly Bill] in terms of the applicable statute of limitations." The Court of Appeal therefore turned to an examination of the statutory scheme and ostensible purpose of section 226.7.

The Court of Appeal stated that, when section 226.7 is read together with Labor Code section 558, the statutory scheme supports a finding the one-hour-of-pay is wages, not a penalty. Section 558 requires employers to pay a civil penalty of $50 for initial violations, and $100 for subsequent violations, for each underpaid employee for each pay period for which the employee was underpaid and to pay the wages to the underpaid employee. According to the Court of Appeal:

Under section 226.7, employers must pay their employees the compensatory remedy of one hour of pay for meal and rest period violations. If employers fail to do so on the payday for the pay period for which the meal and rest period violations took place, they will also be subject to the civil penalty of section 558. This overall scheme suggests that the payment under section 226.7 is in the nature of a statutory remedy to employees because it is unlikely that the Legislature intended to establish two penalties on employers for meal and rest period violations. (Emphasis added.)

The Court of Appeal dismissed as unimportant the use of the term "penalty" in various portions of the legislative history. The Court reasoned: "It appears to us that use of the word 'penalty' in the legislative history to describe the section 226.7 payment is simply a way of describing the effect of the payment on an employer, rather than mandating what statute of limitations should apply to the payment."

The Court of Appeal started this section of the opinion with a reference to the principle that "statutes governing conditions of employment are construed broadly in favor of protecting employees." This principle, the Court concluded, supported the longer statute of limitations.

According to the Court of Appeal, the purpose of section 226.7 further supported its holding. The Court reasoned:

[T]he object of section 226.7 is to pay employees for additional work performed during mandated meal or rest periods and deter employers from requiring employees to work through these periods. Construing this section in favor of employees, it provides a statutory measure of compensation for what would otherwise be uncompensated labor performed during a meal or rest period. The fact that the Legislature tied the section 226.7 payment to the employee's regular rate of compensation also suggests that it considered the payment to be compensation for otherwise uncompensated work, compensation that is properly measured by the employee's regular pay rate. (Emphasis added.)

Conversely, the Court stated, the purposes underlying statutes of limitations do not warrant a one-year limitations period. The Court explained: "Statutes of limitation protect potential defendants from stale claims by affording them an opportunity to gather evidence while facts are still fresh. Because employers are required to keep all time records for a minimum of three years, they will have all documents necessary to mount their defense to plaintiffs' claims."

The Court of Appeal acknowledged and rejected as inconsistent with its interpretation of the statute the contrary view taken by the DLSE in its amicus brief and in the administrative opinion the Department has designated as precedential (Hartwig v. Orchard Commercial, Inc.). The Court of Appeal also mentioned, but did not analyze, the First District Court of Appeal's decision in Murphy.

The Court of Appeal ruled, without any extended analysis, that the remedy may be pursued as restitution under the Business and Professions Code. The Court simply stated: "Employees earn the additional hour of pay when they are denied a meal or rest period; thus, the payments under section 226.7 are restitutionary and recoverable under California's Unfair Competition Law."

While the majority may have attempted a balanced analysis, the foundation for its holding is arguably unsteady. For example, the majority did not conclude the one-hour-of-pay remedy is wages, but rather "a penalty against the employer in the form of a wage to the employee." The three-year statute of limitations in Code of Civil Procedure section 338(a) applies to "[a]n action upon a liability created by statute, other than a penalty or forfeiture." As noted by Justice Irion in her dissent, penalties are excluded without regard to form.

Furthermore, the majority's holding is anchored in its core conclusion that the "object" of section 226.7 is in part "to pay employees for additional work performed during mandated meal or rest periods," i.e., as "compensation for otherwise uncompensated work." However, employees who work during meal periods already must be paid for that work time as hours worked, and by law, rest breaks are paid. Therefore, assuming, arguendo, there is liability for some shortened or late breaks, employees receive the extra hour of pay without necessarily performing this so-called "additional work"; meaning they receive a windfall.

The majority also did not meaningfully examine its own observation that "the [section 226.7] payment is not related to the amount of time worked because an employee receives a full hour of pay for a missed 10 minute rest period or half-hour lunch period." This is true even though the First District Court of Appeal stated in Murphy: "The settled rule in California is that statutes which provide for recovery of damages additional to actual losses incurred, such as double or treble damages, are considered penal in nature, and thus governed by the one-year period of limitations."

Likewise troubling is the Court of Appeal's analysis of section 558. The Court of Appeal noted "it is unlikely that the Legislature intended to establish two penalties on employers for meal and rest period violations." However, if the section 226.7 payment is a penalty, violations do not trigger additional section 558 penalties because there are no "underpaid" employees. In any event, section 558 was enacted a year before the IWC inserted the one hour payment provision into the Wage Orders. The Court of Appeal's conclusion that sections 226.7 and 558 are companion statutes therefore seems ill-founded.

Finally, the Court's analysis regarding the Business and Professions Code claim seems to be fundamentally at odds with California Supreme Court cases, such as Korean Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal. 4th 1134, holding there can be no restitution for penalties.

The Fourth District Court of Appeal's NASSCO opinion increases the likelihood the California Supreme Court will step in to resolve the conflict in the appellate courts. Again, NASSCO and Murphy do not touch on other unsettled legal issues, including:

• whether a private right of action exists under section 226.7;

• whether section 226.7 is unconstitutionally vague;

• the standard for liability under section 226.7 for individual and class claims;

• the interplay between the break regulations and the de minimis violation and waiver doctrines;

• the maximum number of penalties that can be triggered in a single day; and

• due process and other limitations on damages awards.

Closely monitoring case law developments regarding the break period regulations is an imperative for employers with operations in California and other jurisdictions with similar laws.

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