Is Extra Pay for Missed Breaks "Wages" That Must Be Reported?

In the recent California Supreme Court decision in Naranjo v. Spectrum Security Services, Ins., the justices were unanimous in answering this issue.

California law requires employers to provide daily meal and rest breaks to most unsalaried employees.

If an employer unlawfully makes an employee work during all or part of a meal or rest period, the employer must pay the employee an additional hour of pay.

The primary issue before the Supreme Court was whether this extra pay for missed breaks constitutes “wages” that must be reported on statutorily required wage statements during employment and paid within statutory deadlines when an employee leaves the job.

The Supreme Court concluded, contrary to the Court of Appeal, that the answer is yes.

Although the extra pay is designed to compensate for the unlawful deprivation of a guaranteed break, it also compensates for the work the employee performed during the break period.

The extra pay thus constitutes wages subject to the same timing and reporting rules as other forms of compensation for work.

The Supreme Court also resolved a dispute over the rate of prejudgment interest that applies to amounts due for failure to provide meal and rest breaks, and it agreed with the Court of Appeal that the 7 percent default rate set by the state Constitution applies.

Defendant Spectrum Security Services, Inc., (Spectrum) provides secure custodial services to federal agencies. The company transports and guards prisoners and detainees who require outside medical attention or have other appointments outside custodial facilities.

Plaintiff Gustavo Naranjo was a guard for Spectrum. Naranjo was suspended and later fired after leaving his post to take a meal break, in violation of a Spectrum policy that required custodial employees to remain on duty during all meal breaks.

Naranjo filed a putative class action on behalf of Spectrum employees, alleging that Spectrum had violated state meal break requirements under the Labor Code and the applicable Industrial Welfare Commission (IWC) wage order.

The complaint Naranjo also alleged that Spectrum violated state rest break requirements.

Naranjo sought an additional hour of pay — commonly referred to as “premium pay” — for each day on which Spectrum failed to provide employees a legally compliant meal break.

Naranjo’s complaint also alleged two Labor Code violations related to Spectrum’s premium pay obligations. According to the complaint, Spectrum was required to report the premium pay on employees’ wage statements and timely provide the pay to employees upon their discharge or resignation, but had done neither. The complaint sought the damages and penalties prescribed by statute as well as prejudgment interest.

The court first considered Spectrum’s liability for meal break violations. Under the governing IWC wage order, an employer ordinarily must provide covered employees an off-duty meal period on shifts lasting longer than five hours.

An exception to this requirement allows for on duty meal periods if the nature of the work prevents an employee from being relieved of all duty, but only when by written agreement between the parties an on-the-job paid meal period is agreed to.

Naranjo did not dispute that Spectrum had always required on-duty meal periods as company policy because of the nature of its guards’ work but argued that Spectrum did not have a valid written on-duty meal break agreement with its employees.

Agreeing with Naranjo that Spectrum had no valid agreement for part of the class period, the court directed a verdict for the plaintiff class on the meal break claim for the period from June 2004 to September 2007.

A jury found Spectrum not liable for the period beginning on October 1, 2007, after Spectrum had circulated and obtained written consent to its on-duty meal break policy.

The court then considered the related wage statement and timely payment claims.

The court concluded that the obligation to supply meal break premium pay also carried with it reporting and timing obligations.

Whether Spectrum was monetarily liable for failure to abide by those obligations depended on its state of mind: The wage statement statute authorizes damages and penalties only for “knowing and intentional” violations and excuses “isolated and unintentional payroll error due to a clerical or inadvertent mistake”, while the timely payment statutes impose penalties only for “willful[]” failures to make payment.

The trial court concluded Spectrum’s wage statement omissions were intentional and awarded Labor Code section 226 penalties, but the failure to make timely payment was not willful and so Spectrum was not liable for section 203 penalties.

The trial court entered judgment for the plaintiff class on the meal break and wage statement claims and awarded attorney fees and prejudgment interest at a rate of 10 percent.

As the Court of Appeal explained, whether the wage statement and timely payment statutes apply to missed-break premium pay is a question that has generated confusion in the Courts of Appeal as well as in federal courts.

California’s meal and rest break requirements date back to 1916 and 1932, respectively, when the newly created IWC included the requirements in a series of wage orders regulating terms and conditions of employment in various industries and occupations.

The primary questions in this case concern the relationship between the premium pay provision, and the provisions of the Labor Code governing the reporting of wages and timely payment of wages upon discharge or resignation.

When an employer unlawfully denies an employee a meal or rest period and thus becomes obligated to pay an extra hour’s pay, can the employer be held liable if it fails to pay any unpaid missed break amounts within statutorily mandated deadlines?

And can it be held liable if it fails to report that premium pay on a statutorily required wage statement? Spectrum argues the answer to each question is no.

When an employment relationship comes to an end, the Labor Code requires employers to promptly pay any unpaid wages to the departing employee.

The law establishes different payment deadlines depending on the manner of departure. Labor Code section 201 establishes a baseline statutory deadline for paying employees who are discharged from their employment: upon termination, the time of discharge are due and payable immediately.”

Naranjo’s class claim alleged that:

(1) Spectrum was obligated to pay premium pay for noncompliant meal periods (i.e., meal periods during which employees were required to work without a valid on-duty meal agreement in place);

(2) Spectrum was obligated to make these payments in a timely manner upon discharge or quitting, but did not do so; and

(3) this dereliction was willful, warranting imposition of waiting time penalties.

The Court of Appeal was correct that premium pay is a statutory remedy for a legal violation. But the court’s further conclusion that premium pay cannot constitute wages rests on a false dichotomy: that a payment must be either a legal remedy or wages.

For these purposes, premium pay is both.

That is because under the relevant statute and wage order, an employee becomes entitled to premium pay for missed or noncompliant meal and rest breaks precisely because she was required to work when she should have been relieved of duty: required to work too long into a shift without a meal break; required in whole or part to work through a break; or, as was the case here, required to remain on duty without an appropriate agreement in place authorizing on duty meal breaks.

The premium pay due for the deprivation is certainly designed to compensate employees for hardships the Legislature concluded employees should not be made to suffer. But when those hardships include rendering work, the pay owed can equally be viewed as wages.

In this respect, missed-break premium pay is comparable to other forms of payment for working under conditions of hardship.

Take overtime premium pay, for example: An employer who requires an employee to work more hours than the Legislature has determined is generally desirable must pay extra for the privilege, both to compensate the employee for the hardship incident to such work and to deter the employer from routinely imposing such obligations.

And precisely because it compensates the employee for work, overtime premium pay has always also been understood as wages for purposes of Labor Code section 200 and related statutes.

The trial court awarded Naranjo 10 percent prejudgment interest on his meal break claim. The Court of Appeal reversed with instructions to recalculate the award based on a 7 percent rate.

The Court of Appeal was correct to identify 7 percent as the applicable rate.

The state Constitution establishes a default interest rate of 7 percent “upon the loan or things in action, or on accounts after demand.”

Prevailing civil parties are entitled to this interest rate in the calculation of prejudgment interest absent a statute specifying a higher rate.

No statute specifies the rate of prejudgment interest for most tort or other noncontract claims, so, in such cases, the default constitutional rate of 7 percent typically applies.

For many years, the same was true of contract claims. But in 1985, the Legislature enacted a special default rule governing such claims: “If a contract entered into after January 1, 1986, does not stipulate a legal rate of interest, the obligation shall bear interest at a rate of 10 percent per annum after a breach.”

Whether such penalties were available in this particular case is a matter that has yet to be determined.

LESSONS:

1.         California law requires employers to provide daily meal and rest breaks to most unsalaried employees, and if an employer unlawfully makes an employee work during all or part of a meal or rest period, the employer must pay the employee an additional hour of pay.

2.         An employer ordinarily must provide covered employees an off-duty meal period on shifts lasting longer than five hours.

3.         When an employment relationship comes to an end, the Labor Code requires employers to promptly pay any unpaid wages to the departing employee.

4.         Prevailing civil parties are entitled to the interest rate of 7% per annum in the calculation of prejudgment interest absent a statute specifying a higher rate.

5.         When an employer unlawfully denies an employee a meal or rest period and thus becomes obligated to pay an extra hour’s pay, the employer can be held liable if it fails to pay any unpaid missed break amounts within statutorily mandated deadlines?