How an $80 Mistake Became an $88,410 Mistake

First District Court of Appeal

California's Labor Code is full of technical requirements that can trip up even those employers who are trying to comply with their obligations. And, because of the monetary penalties and attorney's fees that can be assessed for violations of those technical requirements, the consequences may be out of proportion to the seriousness of the wrongdoing. A recent decision from the Court of Appeal for the First Appellate District illustrates the problem.

Labor Code section 202 requires an employer to pay all wages due within 72 hours after the employee gives notice of his or her intention to quit. (If the employer discharges the employee, the wages are immediately, under section 201.) If the employer does not pay the final wages within the deadline imposed by the Labor Code, it is subject to waiting time penalties under section 203, which provides: "If an employer willfully fails to pay ... any wages of an employee who is discharged or who quits, the wages of the employee shall continue as a penalty from the due date thereof at the same rate until paid or until an action therefor is commenced; but the wages shall not continue for more than 30 days."

In Nichiki v. Danko Meredith, APC, Case No. A147733 (August 1, 2018), the employer mailed a handwritten check to its departing employee for her final wages, on November 18 (which was within 72 hours of reading an email from the employee announcing her resignation). In the dollar amount box, the amount was given as "2,880.31," the correct amount. But, the amount was spelled out as "Two thousand eight hundred and 31/100." Because of the discrepancy, the employee was unable to deposit the check. She emailed the employer about the problem on November 26. The employer issued a new check for the correct amount on December 5, 9 days later. After a hearing the Labor Commissioner ruled that the employee should recover waiting time penalties for 17 days, from November 18 to December 5, at a daily rate of $250 per day -- a total of $4,250. The employer appealed the ruling to Superior Court, which upheld the waiting time penalty of $4,250, and awarded $86,160 in attorney's fees under Labor Code section 98.2(c).

The Court of Appeal reduced the waiting time penalties to $2,250, for the nine days from November 26 to December 5. By statute, the words written on a check prevail over numbers, which made the original check $80 short. (See Cal. U. Com. Code, section 3114.) Although that mistake was inadvertent, the delay in paying the correct amount became willful once the employer received notice of the mistake on November 26.

The attorney's fees award under section 98.2 was appropriate. That section provides, that the reviewing court must award reasonable attorney's fees to the opponent of an unsuccessful appellant, whether that is the employer or the employee. However, an employee is deemed to be successful if the court awards an amount greater than zero. Because the result, even after the appeal, was an amount greater than zero, the employee is also entitled to the costs and attorney's fees incurred for the proceedings in the Court of Appeal.

The lesson for employers is that you should cut your losses. Once you determine that there has been a violation of the Labor Code, make the employee whole for the violation immediately.

Insurance Agent Is An Independent Contractor, Not An Employee

The enactment by the California legislature of new penalties for willful misclassification of independent contractors should have employers paying close attention to the applicable standards. (See Labor Code section 226.8.) A recent decision from the First District Court of Appeal in San Francisco is instructive. Arnold v. Mutual of Omaha Ins. Co., Case No. A131440 (Dec. 30, 2011).

Kimbly Arnold was licensed by the Department of Insurance as an independent agent or broker. When she was appointed by Mutual of Omaha as a nonexclusive agent, she was under appointment with another insurance company to offer its products. Her contract with Mutual of Omaha stated that she was an independent contractor, and made her responsible for maintaining any required license. The evidence submitted in support of Mutual's summary judgment motion showed that she had no supervision, did not receive a performance evaluation. Training was available, but attendance was not required. Mutual's insurance agents were responsible for their own expenses, including business cards, vehicles and office equipment. If they elected to use Mutual's office, they had to pay monthly fees to cover the expenses.

Arnold brought a class action on behalf of all Mutual's licensed agent's, claiming that they were employees and should have been reimbursed for expenses under Labor Code section 2802, and were not paid the wages they were owed timely upon termination of employment, as required by Labor Code section 201 and 202. The Court of Appeal affirmed the grant of summary judgment for Mutual, because Arnold was not an employee entitled to the protections of those sections.

The Court of Appeal rejected Arnold's argument that she met the "definition" of employee in Labor Code section 2750, which provides "The contract of employment is a contract by which one, who is called the employer, engages another, who is called the employee, to do something for the benefit of the employer or a third person." Section 2750 is not a definition of "employee," but a definition of "contract of employment."

Because it found no statutory definition, the court turned to the common law principles articulated by the California Supreme Court in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989). That decision identified the "principal" factor of the test to be whether the person receiving the services has the right to control the manner and means of accomplishing the result. It identified the following additional factors: whether the principal has the right to discharge at will, without cause; whether the one
performing services is engaged in a distinct occupation or business; the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; the skill required in the particular occupation; whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; the length of time for which
the services are to be performed; the method of payment, whether by the time or by the job; whether or not the work is a part of the regular business of the principal; and, whether or not the parties believe they are creating the relationship of employer-employee.

In this case, all the factors pointed to an independent contractor arrangement.

For a post about another case in which the employer did not fare so well, see $14.4 Million To FedEx Drivers Misclassified As Independent Contractors.

Meal Or Rest Period Violation Premium

As a general rule, California employers must allow their employees two 10-minute rest periods and a 30-minute meal period during a regular work day. If the employer does not do so, under Labor Code section 226.7, it "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." A recent case against United Parcel Service decided that an employee may recover up to two premium payments per work day -- one for any meal period violation and one for any rest period violation.

In United Parcel Service, Inc. v Superior Court, No. B227190 (Feb. 16, 2011), UPS argued that the phrase "for each work day" meant that only one premium payment was due for any work day, no matter how many violations there were. The Second District Court of Appeal disagreed, holding that the phrase "meal or rest period" authorized an award of one premium payment per work day for any meal period violations, and an award of an additional premium payment per work day for any rest period violations. In a case brought by a single employee, the consequences of the ruling would be insignificant, an award of two hours of pay as opposed to one hour of pay. But, in a wage and hour class action, the numbers will add up.

The Court subsequently granted rehearing, and then issued a new opinion on June 2, 2011, adhering to its view that the Labor Code authorized one premium payment per work day for meal period violations, and another for rest period violations. The new opinion is available here.

To reduce liability, employers should monitor compliance with the meal and rest period rules. If a violation is discovered, the employer should consider self-assessing the premium payment. If it does not, any employees who do not receive their breaks will have four years within which to assert their claims, during which time interest will accrue. For any employee who quits or is fired, the employer will also be subject to additional waiting time penalties under Labor Code section 203 for not paying wages on time. That is because the California Supreme Court ruled in 2007 that premium pay under section 226.7 constitutes wages. See Murphy v. Kenneth Cole Productions, Inc., 40 Cal.4th 1094, 155 P.3d 284 (2007).

Pay Final Wages On Time

A recent $18.5 million settlement points up the potential liability for employers who do not promptly pay departing employees all wages owed. The settlement with the corporate owner of Albertson's, Lucky Stores and Sav-on Drugs, allocates $15 million for compensation of approximately 200,000 class members and $3.5 million for attorney's fees and costs. Ward v. Albertson's, Inc., Case No. BC237646 (Apr 14, 2008).

Liability hinged on Labor Code section 203, which provides that all final wages are due on an employee’s last day of work, except that if the employee quit with less than 72 hours notice before their last day of work, all final wages are due within 72 hours of the employee giving notice. Failure to pay on time results in a penalty of an additional day's pay at the regular rate of pay for every day the employee had to wait. In addition, section 227.3 provides that an employer who offers paid vacations must pay all vested vacation at the departing employee's final rate, if there is no collective bargaining agreement.

The notice of intended settlement, which describes the details of the settlement, is available here.