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Class Action Defense Issues-Murphy v. Kenneth Cole: California Supreme Court Holds Three-Year Limitations Period Applies To Labor Code § 226.7 Additional Pay Awards

In Case that will have Direct and Substantial Impact on Labor California Law Class Action Cases, California Supreme Court Rejects Defense Argument that Additional Pay Awards under Labor Code § 226.7 Constitute “Penalties” Subject to One-Year Statute of Limitations and Holds that such Awards Constitute “Wages” Subject to Three-Year Statute of Limitations

Plaintiff, a store manager at a Kenneth Cole Productions clothing store, filed an individual (not class action) lawsuit against his former employer seeking unpaid overtime and waiting penalties, and for meal and rest period and itemized pay statement violations, because he regularly worked 9-10 hours days and rarely took meal or rest breaks. Murphy v. Kenneth Cole Productions, Inc., ___ Cal.4th ___ (Cal. April 16, 2007) [Slip Opn., at 2-3]. The trial court ruled against the employer and, in part, awarded “an additional hour of pay” under California Labor Code section 226.7, and applied to three-year statute of limitations to this award. Id., at 4. Defense attorneys appealed, and the appellate court reversed in part, holding that awards under § 226.7 constituted “penalties” rather than “wages,” and were therefore subject to a one-year limitations period. Id. at 4-5.

Plaintiff initially filed a wage claim with the state’s Labor Commissioner seeking overtime and waiting time penalties; the Commissioner ruled in plaintiff’s favor, and KCP filed for a trial de novo, thereby vesting jurisdiction in the Superior Court. Murphy, at 3. Plaintiff sought additional relief in this civil action, adding claims for failure to provide meal and rest periods and for itemized pay statement violations. Id., at 3-4. The trial court allowed plaintiff to add the additional claims to his action, and ultimately entered judgment in favor of plaintiff. Id., at 4. Of critical importance, the trial court concluded that the “additional hour of pay” awardable under § 226.7 for failing to provide meal or rest periods constituted “wages” rather than “penalties” and so awarded damages for meal and rest period violations dating back to October 2000, id. This issue had been unsettled in California, with the majority of appellate court holding that these damages constituted penalties. The Supreme Court, however agreed with the trial court.

The California Supreme Court acknowledge that while that the statutory language of § 226.7 supported a finding that the payments required thereunder constituted wages in that by its terms the award was for “one additional hour of pay,” Murphy, at 7 (italics added), “the language is also reasonably susceptible of an interpretation that the hour of pay is a penalty intended to punish the employer for denying employees their meal and rest periods,” id., at 8-9. The Court therefore turned to the legislative history, concluding that the intent was to require that employers pay a “premium wage” to employees as redress for failing to provide meal and rest periods, id., at 9-17, and noted that the word “penalty” was removed from drafts of the legislation, see id., at 15. Based on its review, the Supreme Court held at page 17 that “the administrative and legislative history of the statute indicates that . . . the Legislature intended section 22.7 first and foremost to compensate employees for their injuries.”

The Supreme Court considered and rejected the “functional” analysis relied upon by the Court of Appeal in concluding that the additional hour of pay was a penalty. In so holding, the Court stated that the fact § 226.7 intends to influence employer behavior “does not automatically render the remedy a penalty” and is consistent with other statutes that serve “dual-purposes.” Murphy, at 18. The Court also found unpersuasive the fact that the additional hour of pay is owed irrespective to the actual amount of uncompensated time – that is, “whether the employee has missed an unpaid 30-minute meal period, two paid 10-minute rest periods, or some combination thereof.” Id., at 20. In the end, the Supreme Court held that the “additional hour of pay” is “a premium wage, not a penalty,” id., at 31. Accordingly, employees may recover damages dating back three years instead of being limited by the one-year statute of limitations that would govern if the payment constituted a penalty.

NOTE: Plaintiff’s wage claim with the Labor Commissioner included only overtime and waiting time claims, and the trial court rejected a defense motion to limit the scope of the lawsuit to those claims. Murphy, at 3-4. On this point, too, the appellate court had agreed with defense attorneys, holding that additional claims “may not be raised for the first time on de novo appeal from an administrative hearing in front of the Labor Commissioner.” Id., at 5. The Supreme Court disagreed, holding that a trial de novo may include additional, related wage claims. Id., at 23-30. Essentially, the Supreme Court held that the trial court has discretion to entertain such claims, particularly since plaintiff could have simply pursued his additional claims separately with the Labor Commissioner and then granted a motion to consolidate the two civil lawsuits. Id., at 27-28.

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