Yesterday, in Murphy v. Kenneth Cole Productions, the California Supreme Court heard oral argument on whether the "additional hour of pay" mandated by the Labor Code for meal period and rest break violations is compensation, governed by a three-year statute of limitations, or a penalty, governed by a one-year statute of limitations. Donna M. Ryu of the Hastings Civil Justice Clinic argued on behalf of plaintiff John Paul Murphy. Robert W. Tollen of Seyfarth Shaw LLP argued for defendant Kenneth Cole Productions. Mr. Tollen shared his time with Steven Drapkin, counsel for amicus curiae California Employment Law Council.
Ms. Ryu began her argument by pointing out that the primary purpose of Labor Code section 226.7 is to provide compensation where no compensation previously existed. Section 226.7 provides compensation for tangible harms, including fatigue, stress, the inability to make personal phone calls, etc. These are real harms that employees suffer when they do not take their meal periods and rest breaks.
Justice Kennard wasted no time. "Let's get to the heart of the issue—the applicable provisions," she said. "I assume you place your primary reliance on Labor Code section 226.7, subdivision (a)," and then she quoted the provision. She asked whether it was correct to say that for two weeks straight, the plaintiff was required to give up his entire lunch period and work through it. Ms. Ryu said yes, and in fact, due to Kenneth Cole's policies, for two years, plaintiff got no rest breaks at all, and he got meal periods only about once every two weeks. Justice Kennard then quoted Labor Code section 226.7, subdivision (b), and said, "What is your argument to this Court regarding the applicability of this provision?" Ryu said that this provision tells us that the additional hour of pay is compensation, not a penalty. The legislature used the word "pay." They didn't use the word "penalty," and in fact rejected that word.
Justice Kennard continued: "Would you be so kind as to differentiate between a wage, or pay, and a penalty?" Ryu responded that for purposes of the statute of limitations, a statute is a penalty if it is primarily intended to penalize or punish. Justice Moreno then interjected, "Is it your position that this provision is unambiguous on its face?" Ryu said yes. The use of the word "pay" is unambiguous. Also, the word "penalty" is used in two other statutes. Justice Werdegar asked whether the statute we're concerned with is in the section of the Code relating to penalties. Ryu said that it began in a section where there was a true penalty element. Justice Chin then spoke up: "What does the legislative or administrative history say about section 226.7?" (That would turn out to be Justice Chin's only question during the entire argument.) Ryu explained that they started with a remedial scheme with both a compensatory and a penal component. The legislature then dropped the penal component. What remained was the compensatory element. They changed this so that it would be a vested right. With respect to the IWC, the IWC specifically said we're creating this as compensation beyond injunctive relief (the only form of relief previously available). They specifically invoked an analogy to premium pay. This is like overtime, they said.
Justice Baxter then asked, "Does the fact that the amount to be paid is pegged to the employee's hourly rate, does that help or hurt you?" Ryu said it helps. It operates a lot like other forms of pay. It's written in such a way that it's vested. Justice Moreno then said, "What weight do we give to the conflicting IWC letters and references to overtime penalties?" After Ryu started to explain what the Labor Commissioner said, Justice Moreno interrupted and said, "He calls it a penalty." Ryu said, "Yes." Justice Moreno said, "Are we bound by that?" Ryu responded that the Commissioner wasn't talking about it in terms of the statute of limitations.
Justice Moreno then said, "What about other forms of premium pay, such as split shift and reporting time premiums? Are they pay or a penalty?" Ryu said they are pay. They all operate the same way. They are meant to shape or prod the employer's behavior. This is why overtime is referred to as the primary mechanism for enforcing the wage standards. Justice Moreno then asked how that analysis applies to the extra hour of pay for meal and rest break violations. Ryu explained that this is the only compensation available to employees for missed meal and rest breaks. It gives an incentive to the employer to comply with the law. Justice Moreno asked, "What about the argument that the amount doesn't bear a reasonable relationship to the harm? With overtime, it does." Ryu responded that it's still compensation. It's the only compensation that exists. The question is does it fit the violation? It's based on the employee's regular hourly rate. It's a modest form of compensation.
Justice Werdegar then jumped back into the discussion. She pointed out that 30 minutes are required for lunch periods, but the law requires an hour of pay. So the employee has been paid. This gives the employee not only thirty minutes extra but double that. Why is that not a penalty? Ryu said, "An employee is entitled to be paid for time worked." Justice Werdegar said, "Yes, and he gets that." Ryu said it's capped at one hour of compensation for the real harms that employees suffer when they miss their breaks.
Justice Kennard then said, "You acknowledge that they get paid for the half hour. But if here, the defendant violated this by requiring the employee to work through the break, then under section 226.7(b), it becomes an additional hour of pay .... Then under the statute, it's not just a half hour of pay but double. One could make an argument, and reasonably so, because this comes across as a penalty." Ryu said it's important to look at it in the context of the statute of limitations. It's still compensation. We may quibble with how the Legislature decided to provide it, but it's still compensation. She suggested comparing it to split shift pay. The employee may wait around two hours between shifts. Maybe that's not such a serious harm. But what if the employee is required to wait around four hours. That could be a serious disruption, the employee might go home and incur travel expenses, etc. Still, in both situations, the employee gets one hour of pay. Maybe this isn't a perfect fit, but it's a close fit, and more important, it's the only compensation provided.
Justice Kennard then offered a clarification of her prior question, pointing out that under the Labor Code, meal periods are not paid (if taken). Ryu said yes, with rest periods, the time is paid, with meal periods, it's not. (This also served to clarify Justice Werdegar's prior question.) Justice Kennard went on: "You're asking us to agree with your position because it's reflected in the pretty clear statutory scheme, the use of the word 'pay' in (b)." Ryu said, "Yes." Justice Kennard then said, "Let's assume we say, yes, that's a pretty good argument, but also, there's a pretty good argument on the other side, you'd agree that we can then look at extrinsic sources to interpret the statute. Explain how you win."
Ryu said that you have to look at it in the context of the Labor Code. It looks, acts, feels, behaves identically to other premium pay devices. For the plaintiff to win, the Court need only to decide that the payment is not a penalty. (That is because Code of Civil Procedure section 338(a) provides a three-year statute of limitations for "[a]n action upon a liability created by statute, other than a penalty or forfeiture.") The legislative and regulatory history, Ryu said, show a penalty scheme was considered and rejected. What was adopted was a compensation scheme, to compensate employees for real harms. There's no other compensation in the statutory scheme, and the defendant has not identified any.
Justice Moreno asked, "Do penalty provisions exist in other parts of the Labor Code?" Ryu said, "They absolutely do." Justice Moreno said, "How do you differentiate those" from section 226.7? Ryu said that the Legislature knew how to draft a penalty provision when it wanted to. For example, Labor Code section 203 talks about waiting time penalties. It uses the word penalties. Justice Moreno said, "And those were awarded here, weren't they?" Ryu said they were. She said that section 203 creates a penalty amount that is in addition to other compensation. Here, this is the only compensation in the code.
Justice Baxter then threw a heavy wrench into the discussion: "I'm interested in the income tax treatment. Is there any impact on the tax treatment?" Ryu said that wasn't part of the case, but she believes there is an IRS ruling that treats compensation as a wage. "And if it is a penalty?" asked Baxter. Ryu said she was sorry, but she didn't know. (This issue was not mentioned in the briefs that I read.)
Ryu then resumed her argument by saying, "Because the statute is designed to compensate, it must be governed by a three-year statute of limitations." Justice Werdegar broke in: "Excuse me, but the Court of Appeal disagreed with the first part of your argument. To say it's compensation is conclusory; we have to determine whether it is or isn't." Ryu suggested looking to some cases to illustrate the point. She mentioned the Hansen case (phonetic) from the 1920s. In that case, a statute required power companies to provide power to all persons living within a certain distance from their power plants, or pay a $1,000 fee plus $100 per day. The Supreme Court said that's a penalty because there was no harm to be compensated.
Justice Moreno interrupted, saying these aren't Labor Code cases. Ryu acknowledged that none of the prior cases addressing the statute of limitations issue is a Labor Code case. This will be the first time that the issue will be decided in the Labor Code context.
Justice Werdegar then asked, "What do we do with the fact that the most pertinent agency has come forth with an interpretation that this is a penalty?" Ryu said that in this case, the DLSE was counsel with her for Mr. Murphy, and the DLSE argued on his behalf that it was a wage. Nothing has changed since then. The law hasn't changed; the regulations did not change. What changed was the administration (from Governor Davis to Governor Schwarzenegger). Justice Werdegar said, "Did they explain their change in position? Certainly they wouldn't explain it the way you did." The courtroom laughed rather heartily at that. Ryu said they did not. The new interpretive letter gives a very cursory analysis to the question, she said.
Ryu then resumed her argument, saying again that because the statute is intended to compensate, it must be governed by the three-year statute of limitations. Mr. Murphy's remedy should not be cut short by two years; it makes no sense to let Kenneth Cole off for those two years. Justice Moreno then mentioned Labor Code section 226(e) (which relates to remedies for an employer's failure to provide an accurate itemized wage statement). Ryu's response was that in section 226(e) cases, the employee can prove up actual damages or obtain the penalty, which distinguishes it from 226.7 cases.
Justice Moreno then turned the discussion to the second question on which the Court granted review, which was (to quote the docket): "When an employee obtains an award on a wage claim in administrative proceedings and the employer seeks de novo review in superior court, can the employee pursue additional wage claims not presented in the administrative proceedings?" Justice Moreno pointed out that the trial court elected to consolidate all of Mr. Murphy's claims, including those not expressly addressed during the administrative proceeding. Ryu said yes, in this case Mr. Murphy took the administrative route. He did his best to explain what the problem was but he wasn't aware of all of the ramifications. He won before the Labor Commissioner; Kenneth Cole filed suit to challenge the ruling; counsel came in and they noticed other legal claims.
And that was the end of Ryu's time.
Mr. Tollen started out by saying, "I assume from most of the argument and the questions that the Court's primary interest is in section 226.7. But if the court will indulge me, I would like to speak for a moment about the jurisdictional issue." The main point he made, which he said was not addressed in the briefs, related to the plaintiff's argument that while an administrative proceeding is pending before the Labor Commissioner, the time (i.e., the statute of limitations) will run out. He said it's written into the statute to provide a speedy remedy, quoted various deadlines provided by the statute, and said it's a total of 145 days. The administrative proceeding will be resolved less than five months from the time the plaintiff first goes to the Labor Commissioner. If the "plaintiffs' bar" thinks that the Labor Commissioner is violating these provisions by taking too long, then they should file an administrative enforcement action against him.
He then went on to section 226.7. He said that the question is what is the effect or function of the statute, not what the Legislature intended. Nevertheless, to the extent the Court might consider intent, "I don't understand" how counsel can contend that the Legislature intended to enact something that is not a penalty, when it told us what it was doing. First, the statute included a $50 penalty. That was stricken. Then, the words we now have were adopted. The Legislature wrote that it was deleting the provisions relative to penalties and instead was adopting the lower penalty amounts that the IWC had promulgated. In addition, the Department of Industrial Relations and the DLSE told the governor that the bill supported the underlying purpose of providing a penalty.
Tollen then addressed Ryu's point relating to the DLSE's representation of Mr. Murphy early in the case. He said that the DLSE (which he referred to as "the Labor Commissioner's agency") is required by statute to provide counsel to an unrepresented employee who wins in the administrative proceeding, and whose victory is challenged in a de novo appeal. The DLSE is required to argue on the employee's behalf. This doesn't affect the official position taken by the Labor Commissioner.
Justice Moreno then interjected: "Back to AB 2509, weren't there other amendments to the Labor Code where they retained the 'penalty' language?" Tollen said the reason the Legislature retained the language that is used in section 226.7 is because they adopted, lock, stock and barrel, the words the IWC adopted in early 2000, just before this bill was introduced. Justice Moreno said, "But they kept the 'penalty' language in sections 203.1 and 226 in the same bill." Tollen said that's because those provisions weren't adopting something that the IWC had previously done. He pointed out that section 203 talks about employer liability for 30 days' additional "wages" as a "penalty." He said that the even when the Legislature uses the word "wages," that can actually mean a "penalty."
Here, Chief Justice George spoke for the first time. "But that's very different from this section, which doesn't use the word 'penalty,'" he said. Tollen said, "Yes, but my position is that use of the word 'wage' does not mean it's not a penalty." Chief Justice George continued, "But couldn't one argue even more persuasively that if it doesn't use the word 'penalty,' it's not a penalty?" Tollen said, "No, I don't think it can be interpreted that way, especially when they told us what they intended to do." Chief Justice George said, "You don't place much weight on its placement within the Labor Code?" Tollen said yes, it's in a row of statutes that also include penalties. Section 226.3 provides a civil penalty; section 227 provides for a fine or imprisonment. They put 226.7 smack in the middle.
Justice Baxter then interjected with: "I have a concern. As I understand it, the amount of a penalty generally follows the culpability of the conduct. The worse the conduct, the higher the penalty. Yet here, the failure to provide meal or rest breaks for a person earning minimum wage is significantly less than for a person with a higher position. I can't see any difference in the conduct. From the employer's perspective, there's no difference between violating the law for a low-level employee than for a high-level employee. To me, that strikes me more as compensation. Whereas if it were a uniform figure, that would seem more like a penalty. I can't imagine the Legislature would want to go on record saying that denying breaks to a minimum wage employee is less important than a higher-level employee."
Tollen said that the Legislature has done that in section 203 for termination penalties. It's going to vary from a low-level to a high-level employee, yet they're all going to get 30 days' pay. Tollen observed that it's an interesting argument, not one that the plaintiff has made. Plaintiffs argue it's compensation. We say that to be compensation, it must be proportionate to the violation. What are the consequences of the violation? The employee may be fatigued, but what's not mentioned is that the employee might be actually injured from working while fatigued, or the employee may not be injured at all. This payment is not designed to analyze whether the employee is injured or the extent of the injury.
Justice Baxter said, "But it's pinned to the employee's compensation." Tollen said it's a mixed situation. Yes, it's pegged to compensation. That's what our opponent grabs onto. But on the other hand, it's not related to the injury.
Justice Corrigan then spoke for the first time: "You'd take the position, then, that even though they're denied the break, they're paid for the work?" Tollen said yes. The employee is compensated for time worked, plus the employee gets an extra compensation, a full hour of pay. It makes no difference the extent of the loss, the length of the lost time. Justice Corrigan said that if an employee is required to work through two 15-minute breaks, they are entitled to: (a) pay for 30 minutes and (b) an extra hour of pay. "So double." Tollen said there is a distinction for rest breaks. Justice Corrigan said but in the context of rest breaks they get double pay. Tollen said yes, but it's more than double pay. They get 20 minutes of pay and an additional hour. (Here, Tollen was correcting Justice Corrigan. The Labor Code requires 10-minute, not 15-minute, rest breaks.) Justice Corrigan asked how it would work differently in the context of meal breaks. Tollen said that if an employee takes the meal break, they are not paid. If the employer violates the law by requiring an employee to work through the meal break, there are two consequences. The time worked must be paid, and the employer has to pay an additional hour of pay even though the employee only lost a 30-minute meal period. Justice Corrigan said, "Thank you."
Tollen resumed his argument by saying, "I want to go back to the intent of enacting 226.7, the letter that the author of the bill sent to Governor Davis." He then quoted parts of the letter where the word "penalty" was used. Then, he referred back to some of the earlier questioning about reporting time and split shift payments, but Justice Kennard interrupted. She pointed out that he may be out of time and that she had hesitated to ask him further questions for that reason. Chief Justice George then informed Tollen that he was out of time.
Before the argument started, the clerk came out and addressed the waiting audience about the procedure. He confirmed that Tollen planned to take 15 minutes of argument time, and to give the other 15 minutes to Mr. Drapkin. Tollen then specifically asked the clerk whether the Chief Justice would notify him when his 15 minutes were up. The clerk said the Chief Justice would. However, he did not. By the time Justice Kennard mentioned that Tollen might be out of time, more than 15 minutes had clearly passed. But Tollen certainly can't be blamed here for not keeping track of the time himself. He was told that the Chief Justice would interrupt when his 15 minutes were over.
In any event, Mr. Drapkin then rose and prefaced his argument by saying that he had a lot to say. He referenced back to Justice Kennard's question at the outset about what a penalty is. He said that the Court has defined the term "penalty" consistently for the past 100 years in the statute of limitations context and related contexts. A penalty is an amount a plaintiff is allowed to recover against a wrongdoer without reference to injury. An alternative test, from Ballarino (phonetic), is for an act in the nature of a public wrong. This is the definition. It's been applied again and again.
Justice Kennard said, "If we were to agree with you, would it cause some problems with the principle that the Court must construe the statute liberally in favor of the employee? If we agree with you, would we have to go against that?" Drapkin said that this case is primarily about the Code of Civil Procedure, not the Labor Code. Further, if you were interpreting the Labor Code, there are countless cases saying that the rule of liberal construction is not a substitute for legislative intent.
Justice Kennard replied sardonically, "You mean this case is strictly about the Code of Civil Procedure? And here I thought we were dealing with the Labor Code." (In my opinion, it was crystal clear from the first 40+ minutes of the argument, especially the very beginning when Justice Kennard took the time to actually quote subdivisions (a) and (b) of section 226.7, that the Court thinks this case is about interpreting the Labor Code.) Tollen stuck to his guns, saying no, we're dealing with the Code of Civil Procedure, the statute of limitations, in a particular context. So, cases interpreting the Code of Civil Procedure are entirely relevant.
He said that some Labor Code provisions have been interpreted as a penalty. He mentioned the Hansen case (phonetic) against the power company, in which the Court found a penalty. He said it could be that failure to provide utilities might cause no injury or great injury. Yet the penalty doesn't vary. That's our case here.
At this point Justice Baxter interrupted with another question about the tax consequences of the holding that the payment is a wage vs. a penalty. I believe, but did not catch every word, that Drapkin said that wages are deductible by the employer, which is what Justice Baxter seemed to be interested in.
Drapkin then referred back to the prior question about the fact that the amount payable is higher or lower based on the employee's rate of pay. He said that this may, in fact, be irrational. It may be unconstitutional. It may constitute a penalty upon penalty and there may be due process concerns (although this has not been argued here). He said the function is what controls. He observed it was interesting that there had been no discussion of the plaintiff's hybrid theory.
He said he agreed that the primary purpose of section 226.7 was to secure or compel compliance with the law. Injunctive relief wasn't strong enough. This is where the penalty came from. Employer groups came forward and said the IWC doesn't have the power to impose a penalty. That's where this came from. There was no discussion in the legislative history about compensating for fatigue etc. The only focus was to secure compliance with the law. And that's the hallmark of a civil penalty.
Plaintiffs say, well, it's a hybrid. Well, if it is, which we vehemently disagree with, then he has a new case to cite. 13 Cal.2d 285. The Court found the payment in question was damages. But the Court said where damages are given wholly to the plaintiff, the action is not penal.
(It is not clear how this argument supports his position. The cited case does include this language: "Where the damages are given wholly to the party injured as compensation for the wrong and injury, the statute having for its object more the indemnification of the plaintiff than the punishment of the defendant, the action is not penal, properly so called, but remedial." Agudo v. County of Monterey, 13 Cal.2d 285, 289-90 (1939). But that language supports the plaintiff's position. The extra hour of pay under section 226.7 is "given wholly to" the employee who missed a meal or rest break. Therefore, under the cited case, it would not be a penalty.)
Mr. Drapkin pressed on. He said that where the primary purpose is to compel or coerce compliance, it is a penal purpose. This goes back forever in the case law. Mr. Drapkin's final point was that the DLSE's contemporaneous analysis to Governor Davis was that the payment was a penalty. Governor Davis was told that the provision was needed to compel compliance with the law.
On rebuttal, Ms. Ryu had not uttered a single word before Justice Corrigan said, "If an employee who is compelled to work through rest breaks and lunch and they are paid for the time they work, and the employer is compelled to pay an additional hour of pay, that seems like a penalty." Ryu said, "Absolutely not." Justice Corrigan said, "OK, then help me." Ryu said let's use an example, a farm worker. The worker knows that under the law they will work for 7 hours and 40 minutes and get paid for 8 hours of work. They also know they will get to rest twice. Justice Corrigan interjected, "And if they don't get it and they are paid, they are compensated and the employer is punished. Isn't that right?" Ryu said, "No. They worked all day in the sun. Even if the employer pays 8 hours, they really haven't been compensated for working under these more strenuous conditions. There is no other compensation in the Labor Code for this."
Justice Werdegar said, "But as opposing counsel observed, it's not tied to the injury. Which sounds like a penalty." Ryu said you have to remember we're talking about conduct within a certain scope and range of behavior. The question is for this to be a penalty, does there have to be an exactly perfect fit? For example, the 50% overtime requirement. The employee doesn't have to prove that he worked 50% harder to get the overtime pay. It's rough justice. But it's close enough.
Justice Werdegar further said, "What do you say to the defense argument that we're talking about the Code of Civil Procedure, not the Labor Code?" Ryu said this Court would disagree. Its precedents say that the Court must look at the entire statutory scheme. This is a case about the Labor Code.
Justice Kennard summed up: "And according to your view, the Labor Code is very much at issue here because at the outset you and the Court talked about the language of the Labor Code section. The question is whether its language is clear or ambiguous. So in short, your view is we're not just dealing with the Code of Civil Procedure, but also the Labor Code." Ryu replied, "Yes, that's absolutely right." Then Chief Justice George announced that her rebuttal time was up.
In light of the justices' remarks and questions, I would not be surprised to see a split decision in the employee's favor. The opinion will be due in 90 days, or by June 5. Comments?