2006-3

California Appellate Courts Are Split on Whether Payments for Meal and Rest Break Violations Are Wages or Penalties.

Two California appellate courts have issued conflicting decisions on the question of whether payment for meal and rest period violations should be treated as a wage or penalty. In National Steel & Shipbuilding Co. v. Superior Court, 2006 DJDAR 795 (Cal. App. Jan. 20, 2006), (1) the Fourth Appellate District, Division One, held that payment to an employee under Labor Code section 226.7 for meal and rest break violations is a wage, and not a penalty, and thus subject to a three-year statute of limitations. However, the Second Appellate District, Division Five, held otherwise, finding that payment for the violations is a penalty and, thus, subject to a one-year statute of limitations. Mills v. Superior Court, 2006 DJDAR 1166 (Cal. App. Jan. 27, 2006). (2) The decision in Mills is consistent with an earlier California Court of Appeal opinion and a Precedent Decision by the California Division of Labor Standards Enforcement ("DLSE").

The plaintiffs in National Steel & Shipbuilding Co. sued their employer ("NASSCO") in a putative class action, alleging that over the prior four years, the company had violated the Labor Code and certain Industrial Welfare Commission ("IWC") wage orders by requiring them to work in excess of five hours per day without receiving a meal break of at least 30 minutes and not providing them with a 10-minute rest period every four hours. Plaintiffs alleged that these violations constituted unfair competition under Business and Professions Code section 17200 and sought compensation of one hour's pay for each day of violation of the meal or rest period law (Labor Code section 226.7(b)). NASSCO moved to strike any reference in the complaint to a time period of more than one year prior to its filing, on the ground that the "one additional hour of pay" required by section 226.7(b) was a penalty subjecting plaintiffs to a one-year statute of limitation under Code of Civil Procedure section 340(a). In opposition, plaintiffs argued that the additional hour of pay was a wage, not a penalty, for which they could seek restitution up to four years before filing their complaint under the Business and Professions Code.

The trial court in National Steel & Shipbuilding Co. held that Labor Code section 226.7 created a wage and denied the motion to strike. NASSCO filed a writ petition seeking review of the trial court's order. The appellate court eventually denied NASSCO's writ petition, concluding that the payment under section 226.7 was a wage and subject to the longer statute of limitations.

Labor Code section 226.7(b) provides that "[i]f an employer fails to provide an employee a meal period or rest period in accordance with an applicable order of the Industrial Welfare Commission, the employer shall pay the employee one additional hour of pay at the employee's regular rate of compensation for each work day that the meal or rest period is not provided." The court found that the payment required by section 226.7 reasonably could be interpreted as both a penalty and a wage, and since the Legislature did not address what limitations applied, the statute was ambiguous.

The court then looked to the legislative history of section 226.7. The original Assembly Bill that ultimately led to the statute's enactment subjected employers to a $50 penalty for each violation, as well as payment to the aggrieved employee in an amount equal to twice his or her average hourly rate of compensation for the full length of a meal or rest period during which the employee was required to perform any work. The language describing a penalty, however, was ultimately deleted and replaced by the existing IWC wage order regarding meal and rest periods. The amendments to the Assembly Bill also eliminated the need for an employee to file an enforcement action and instead created an affirmative obligation on the employer to pay the employee the one hour's pay. The court noted that the statute is self-executing, in that an employee is immediately entitled to the section 226.7 payment, just as the employee is immediately entitled to payment for overtime. The court concluded that the self-executing nature of the payment suggests it is not a penalty because the right to a penalty does not accrue until it has been enforced. Because the hour of pay under section 226.7 is owed when it is incurred, the court found that it was similar to earned wages.

The court also examined Labor Code section 558, which subjects employers to civil penalties (enforceable by the Labor Commissioner) for any violation of an IWC wage order regulating hours and days of work. The statute 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. The court found that sections 558 and 226.7 complement each other. Section 226.7 requires employers to pay their employees the compensatory remedy of one hour of pay for meal and rest period violations. If the employer fails to do so on the payday for the pay period for which the meal and rest period violations took place, the employer will then be subject to the civil penalty of section 558. The court concluded that 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." The appellate court rejected the DLSE's contention that section 558 does not apply to meal or rest period violations.

The court in National Steel & Shipbuilding Co. thus concluded that the payment under Labor Code section 226.7 is an obligation created by statute and governed by Code of Civil Procedure section 338(a), rather than a penalty under Code of Civil Procedure section 340(a). Because statutes governing conditions of employment are construed broadly in favor of protecting employees, the court found that the longer limitation period should apply. The court noted that the statute provides a statutory measure of compensation for what would otherwise be uncompensated labor performed during a meal or rest period. Further, the fact that the Legislature tied this Labor Code section 226.7 payment to an employee's regular rate of compensation suggested that the Legislature considered the payment to be compensation for otherwise uncompensated work. Construing the payment as a penalty would result in employers with lower paid employees being "penalized" less than employers of higher paid employees for the same conduct.

In Mills, petitioner Debra Mills claimed her employer, Bed, Bath and Beyond, frequently denied her and hundreds of other employees required meal and rest breaks. She filed a class action on behalf of herself and others for back wages and penalties. The employer demurred to Mills' complaint and argued that any payments to which she might be entitled under Labor Code section 226.7 are penalties and, thus, cannot be recovered separately as wages. The trial court sustained the demurrer, and Mills filed a petition for writ of mandate seeking to compel the trial court to vacate that portion of its order concluding section 226.7 payments are not wages.

The appellate court in Mills found that Labor Code section 226.7 is ambiguous as to whether the payment it requires constitutes an additional wage or a penalty. Based on the legislative history of section 226.7, the court held that the required payments were intended to be penalties. The court noted, as did the National Steel & Shipbuilding Co. court, that the Assembly Bill resulting in section 226.7 initially provided for penalties of $50 per violation against employers who fail to give rest and meal breaks and, further, made the employers liable to the employee for double pay for the length of the break period in which the employee was required to work. When the Assembly Bill moved to the Senate, however, the penalty provisions of the bill were amended such that the employer would be liable to the employee for one additional hour of wages for the workday, regardless of the amount of break time actually worked. The Assembly noted that this "penalty" was the same as the one that had been adopted by the IWC to punish employers who fail to give breaks. In agreeing with the Senate's change, the Assembly continued to describe the additional payments as a "penalty." The Mills court concluded that although the calculation of the payment for violation was changed, "to the very end of the legislative process the additional money an employer would have to pay for failing to ensure mandated break periods was considered a penalty." Further, wages are compensation for services rendered, but the payments due under section 226.7 for missed breaks do not compensate an employee for additional services rendered. The failure of the statute to correlate the payment due to any additional labor performed by an employee was found by the court to undermine any argument that payment is a wage. The appellate court thus denied Mills' petition for writ of mandate and upheld the trial court's ruling in favor of the employer.

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Summary Judgment in Favor of Employer Was Improper Where Plaintiff Raised a Triable Issue as to Whether the Stated Reason for Her Termination – Corporate Downsizing – Was a Pretext for Pregnancy Discrimination.

The California Court of Appeal reversed a summary judgment for defendant Stamps.com Inc. and found that its former employee, plaintiff Megan A. Kelly, established a triable issue of fact as to whether the stated reason for her termination – corporate downsizing – was actually a pretext for terminating her because of her pregnancy. Kelly v. Stamps.com Inc., 2006 DJDAR 852 (Cal. App. Dec. 21, 2005) (modified and certified for publication Jan. 20, 2006). (3)

Defendant sells postage and related services on the internet. In October 1999, defendant hired Kelly as its Vice-President of Direct Marketing at a base salary of $130,000 a year, later increased to $150,000. Upon hiring, Kelly signed an employment agreement and a confidentiality agreement, both of which provided that her employment was at will. Kelly performed marketing activities for defendant's small business unit and reported to her supervisor, Doug Walner. In the same year Kelly was hired, defendant suffered severe significant financial losses and, to reduce expenses, laid off nearly half of its employees in October 2000. Kelly, who had informed the company the previous month that she was pregnant and would be taking maternity leave in April 2001, was not among those terminated. Further, as part of a program to retain the remaining employees, Kelly received stock options in October and was awarded a cash retention bonus of 35% of her $150,000 salary to be paid over a 180-day period.

Also in October 2000, defendant hired a new Chief Executive Officer, Bruce Coleman, who retained a consultant, Kathleen Brush, a marketing expert and turnaround specialist. Brush was responsible for recommending ways to cut defendant's costs and streamline its marketing efforts. According to Brush and the company's Chief Financial Officer, Kenneth McBride, upper management had become dissatisfied with the performance of Kelly's marketing group.

In early 2001, defendant decided that its cash flow required another reduction in workforce by approximately 150 employees, which would be implemented in early February. As a result of the consolidation, the sales and marketing functions of its various business units would be combined into one unit. Coleman directed Brush to evaluate defendant's marketing employees and inform him who should be retained for the new sales and marketing group. According to Brush, she evaluated Kelly on the merits and without regard to her pregnancy. However, at least once before January 2001, Coleman told McBride he believed that Kelly's attendance was poor and he used the term "checked out" to refer to her poor attendance and attitude. When Brush submitted a list of marketing employees to be retained, Kelly was not on the list. In her evaluation of Kelly, Brush stated she did not consider Kelly for a position after the restructuring because her current responsibilities were scheduled for further reduction and personnel layoffs. Brush also criticized Kelly's effectiveness as a leader and noted she had "limited motivation," often arriving late. The list was presented to Coleman, who approved Brush's recommendations. Kelly was terminated on February 6, 2001, and received $25,000 severance pay.

Kelly sued defendant for violation of the Fair Employment and Housing Act ("FEHA"), Gov't Code § 12940, and several other claims. Kelly alleged she was discharged from her employment "because she was 7 months pregnant and was planning on taking her promised paid maternity leave in connection with the birth of her child in April 2001." Defendant moved for summary judgment, asserting that the pregnancy-bias claim was unmeritorious because Kelly had been terminated as part of the company's reorganization and she could not establish a triable issue that this reason was a pretext for discrimination against her. The court granted defendant's motion for summary judgment.

The appellate court reversed and found that Kelly had established a triable issue of fact as to pretext. Kelly conceded that in February 2001, defendant had implemented a restructuring and reduction in force to reduce costs. However, Kelly introduced evidence from former employees to show that her specific termination was discriminatory. Kelly's former supervisor, Walner, gave an appraisal of Kelly's responsibilities and performance that were quite different from those of Brush. He described Kelly as "an excellent employee, very good at all aspects, with a like understanding of brand marketing and its goals." He also attached a formal assessment of Kelly that he had prepared in October 2000 which showed her rating as "above expectations." CEO Coleman had asked Walner to prepare a list of employees who should be retained after the February 2001 reduction in force, and he recommended retaining Kelly. When Coleman asked why Walner had included Kelly, Walner replied he felt that she was the only person capable of managing the group. Coleman then commented that Kelly had mentally "checked out." Walner claimed that Coleman made the "checked out" comment within the context of Kelly being pregnant. A similar exchange was attested to by Ian Siegel, defendant's Vice-President for web development. Siegel asserted that he considered Kelly extremely competent and a tremendous asset to defendant. When he told Coleman that Kelly should be retained after the reduction in force, Coleman replied, "Megan has checked out." When Siegel told Coleman it would be a mistake to assume this, Coleman repeated that Kelly had "checked out." Siegel stated that Coleman made the remark "in a definitive, end-of conversation type of way." Kelly herself testified to commendations she had received from numerous members of defendant's management during her tenure and testified that none had ever negatively commented on her performance.

Because Walner and Siegel had told Kelly how Coleman had referred to her as having "checked out," on the afternoon of February 5, 2001, Kelly met with Mike Zuercher, in-house counsel for defendant. Kelly told Zuercher she was afraid she would be included in the reduction in force, notwithstanding that her group had been performing well, and that she could not help but think that Coleman "thinks I am checked out because I am pregnant and I am going to go off on maternity leave." She also stated her concern that McBride wanted her gone as well, and related that she had heard McBride had made vulgar and derogatory remarks about her which also led her to believe that he might now want to get rid of her.

After her discharge, Kelly met with Coleman on February 12, 2001, with Zuercher also in attendance. Kelly told Coleman her beliefs about her discharge and asked him to explain in light of her having been at the top of Walner's list for retention. Coleman replied that Kelly had not been on Walner's retention list and that the company had eliminated her position. Kelly responded that she did not understand, because many of her functions were still ongoing.

The appellate court concluded that Kelly had met her burden of showing a triable issue of fact as to defendant's stated reason for her termination. The court noted that downsizing alone is not necessarily a sufficient explanation under the FEHA for dismissing a protected worker. Kelly presented evidence of a number of circumstances that cast doubt on the genuineness of defendant's explanation for her discharge. First, Kelly was let go despite a record of excellence in her executive responsibilities, as attested to by both her superior Walner and another high executive with whom she worked, Siegel. Further, when these executives were asked by Coleman who should be retained in marketing, both stated Kelly should be retained because of her abilities to manage marketing efforts in a period of downsizing and transition. Despite this advice, Coleman dismissed these recommendations with the "peremptory expression" that Kelly had "checked out." The court noted that in at least one instance when Coleman used the phrase concerning Kelly, he also referred in some fashion to her pregnancy. Even if the language was considered non-discriminatory in isolation, the court found no doubt that Coleman's manifest attitude toward Kelly's retention was "bluntly negative," in contrast to the views and assessments of the executives who had worked with her.

The court also noted there was evidence that Coleman lied to Kelly when asked to explain her termination. He denied that she had been on Walner's list of persons suggested for retention, but according to Walner she had been the first one on his list he had recommended that Coleman retain. Moreover, despite defendant's contention that Kelly was discharged because her position had been eliminated, a new employee, Brush (who was not pregnant), had assumed Kelly's title of Vice-President of Marketing after Kelly left. The content and circumstances of Brush's written evaluation of Kelly also supported Kelly's claims of pretext and discrimination. Brush's negative opinions conflicted with those of defendant's managers who were more familiar with Kelly and her performance.

The court concluded that Kelly presented a triable issue that the reason or reasons defendant gave for her termination were false and, in fact, the true reason was that Kelly was about seven months pregnant and was expected to take her allotted three months pregnancy leave. Coleman's "checked out" comments could reasonably be understood as referring to some combination of Kelly's commitment to take the leave, and a temporary diversion of her attention from work. Thus, Coleman could be seen as saying that Kelly's pregnancy and upcoming leave disqualified her for retention.

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The California Fair Employment and Housing Act Does Not Require an Employer to Transform a Temporary Accommodation into a Permanent Job Assignment Once the Employee's Temporary Disability Becomes Permanent.

In Raine v. City of Burbank, 2006 DJDAR 984 (Cal. App. Jan. 25, 2006), (4) the California Court of Appeal held that the Fair Employment and Housing Act ("FEHA") does not obligate an employer to make a temporary position available indefinitely once an employee's temporary disability becomes permanent.

Plaintiff Mark Raine was employed as a police office for the Burbank Police Department ("BPD") from 1981 through 2002. Raine worked as a patrol officer until 1995, when he suffered an injury to his knee. Thereafter, Raine had difficulty running, jumping, kneeling and lifting – activities that he conceded are essential to perform the duties of a patrol officer. In 1995, BPD reassigned Raine to a temporary light-duty position at the Department's front desk to accommodate him while his injury healed. Raine remained in the position until 2002, when his physician advised BPD that Raine's disability was permanent and he would never be able to perform the essential functions of a patrol officer.

BPD then arranged a job analysis, with input from Raine and his immediate supervisor, as part of the interactive process mandated by FEHA to determine effective reasonable accommodations, if any, in response to an employee's request for a reasonable accommodation. BPD told Raine that it had no available position for a sworn police officer with his qualifications and physical limitations. Raine took disability retirement and sued BPD, the City of Burbank, and three senior City officials for various claims including disability discrimination and failure to accommodate in violation of the FEHA.

The City moved for summary judgment. The City provided evidence that the front desk position at BPD is permanently staffed by civilians called "police technicians" who are paid substantially less and provided fewer benefits than sworn police officers. The position is also reserved as a temporary light-duty assignment for police officers recovering from injuries. Non-injured police officers sometimes fill in temporarily at the front desk when a police technician is unavailable. The City argued that the BPD accommodated Raine's disability by reassigning him temporarily to the front desk position while he recovered from his injuries. However, when advised by Raine's physician in 2002 that his injuries would not get better and that he would never be able to perform the job functions essential to patrol officer, the City advised Raine it could not permanently accommodate him at the front desk without changing his status from police officer to police technician. Raine was not interested in a civilian position because he would forfeit his police retirement benefits if he continued to be employed by the City after he took a disability retirement. The City presented evidence that there was no position available in the Department to accommodate Raine other than the civilian position of front-desk technician.

The trial court granted summary judgment, concluding: (1) Raine was not a qualified person with a disability under FEHA because he was unable to perform the essential job functions of a sworn patrol officer with or without reasonable accommodation; (2) it was unreasonable to require the City to permanently place Raine at the front desk, a permanent position reserved for civilian personnel, without altering his police officer status and salary; and (3) there was no evidence of disability discrimination. Raine appealed, but the appellate court affirmed summary judgment for defendants. Raine asserted there was a triable issue of fact as to whether a permanent assignment to the front-desk position was a reasonable accommodation. The court stated: "FEHA does not obligate an employer to choose the best accommodation or the specific accommodation a disabled employee or applicant seeks.... It requires only that the accommodation chosen be ‘reasonable.'" Although the FEHA does not define what constitutes a reasonable accommodation, the examples provided in the statute and regulations include accommodations such as job restructuring, part-time or modified work schedules, or reassignment to a vacant position. If the employee cannot be accommodated in the existing position and the requested accommodation is reassignment, the employer must make affirmative efforts to determine whether a position is available.

While there was no dispute that Raine could perform the essential functions of the front-desk assignment, the question was not whether he was qualified for that position, but whether he was entitled as a reasonable accommodation to remain at the position permanently. The court stated: "FEHA does not require the employer to create a new position to accommodate an employee, at least when the employer does not regularly offer such assistance to disabled employees." While Raine was entitled to a reasonable accommodation, which would have included job reassignment if a vacant position existed, the City was not required to create a new position of front-desk officer for him, a position that was reserved for civilians on a permanent basis or as a temporary light-duty assignment for police officers.

Raine argued that the accommodation he sought was not the creation of a new job, but the restructuring of the existing position at the front desk. The court disagreed. Raine did not seek the restructuring of any position, but rather the reclassification of the front-desk job from a civilian position to a sworn officer position that would allow him to retain the benefits afforded to sworn officers without the "attendant essential functions of the sworn-officer position."

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Appellate Court Enforces Employment Arbitration Agreement with Class-Action Waiver.

The California Court of Appeal denied a petition for writ of mandate from a trial court order compelling arbitration, and found that an employment arbitration agreement containing a class action waiver was neither substantively nor procedurally unconscionable and, thus, was enforceable. Gentry v. Superior Court, 2006 DJDAR 737 (Cal. App. Jan. 19, 2006). (5)

Plaintiff Robert Gentry filed a class action lawsuit against his employer, Circuit City, alleging that Circuit City had illegally misclassified him and other salaried customer service managers as "exempt managerial/executive employees" not entitled to overtime pay, when in fact, they were "non-exempt non-managerial employees" entitled to compensation for hours worked in excess of 8 hours per day and 40 hours per week. While employed at Circuit City, Gentry received the company's "Associate Issue Resolution Package" and a copy of its "Dispute Resolution Rules and Procedures" pursuant to which employees are offered various options, including arbitration, for resolving employment-related disputes. The arbitration agreement also contained a class action waiver. Employees were given 30 days to opt out of the arbitration agreement, but Gentry did not do so.

Circuit City moved to compel arbitration, and the trial court granted the motion. Gentry filed a petition for writ of mandate. In light of the recent California Supreme Court decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), the Court of Appeal denied Gentry's petition and found that the class action waiver was neither procedurally nor substantively unconscionable.

Procedural unconscionability generally takes the form of a contract of adhesion which is imposed and drafted by the party of superior bargaining strength and relegates the subscribing party only the opportunity to accept or reject the contract. In the employment context, the California Supreme Court has found pre-employment arbitration agreements to be adhesive where the agreement is made a condition of employment. The agreement at issue here, however, lacked the adhesive element. Signing the arbitration agreement was not a condition of Gentry's employment. He was given 30 days to decide whether or not to opt out of the agreement, and he chose not to do so.

Gentry claimed the agreement was procedurally unconscionable despite the opt-out provision because "Circuit City attempted to ‘sucker unsophisticated employees into not opting out' by touting the advantages of arbitration." The court disagreed, noting that the "Associate Issue Resolution Handbook" pointed out both the advantages and the disadvantages of electing arbitration.

The court also found the class action waiver was not substantively unconscionable. Substantive unconscionability generally refers to an unfairly one-sided agreement. The court contrasted the instant case to the facts in the Discover Bank case. There, the class action waiver was found substantively unconscionable because it was in a consumer contract of adhesion in a setting where the disputes between the contracting parties predictably involved small amounts of damages and it was alleged that the party with the superior bargaining power had carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money. The state Supreme Court found the waiver in Discover Bank was unconscionable because it essentially exempted the superior bargaining party from responsibility for its own fraud or willful injury to the person or property of another. By contrast, Circuit City's waiver did not exhibit these infirmities. Gentry had an opportunity to reject the arbitration agreement. Moreover, this was not a case in which the disputes between the contracting parties involved small amounts of money or where there was an alleged scheme by the superior bargaining power to cheat a large number of consumers out of small sums of money. Gentry alleged statutory violations that could result in substantial damages in penalties should he prevail on his individual claims. Because the arbitration agreement was neither substantively nor procedurally unconscionable, the court ruled it was enforceable.

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1. Opinion by McIntyre, J., joined by McConnell, P. J.; dissent by Irion, J.

2. Opinion by Armstrong, J., joined by Turner, P.J. and Mosk, J.

3. Opinion by Cooper, P.J., joined by Boland and Flier, JJ.

4. Opinion by Perluss, P. J., joined by Johnson and Woods, JJ.

5. Opinion by Armstrong, J., joined by Turner, P. J. and Kriegler, J.