Friday, November 19, 2010

California Supreme Court Holds 3 Year Statute Governs All Section 203 Penalty Actions, But Finds Penalties Non-Restitutionary Under the UCL: Pineda v. Bank of America

On November 18, 2010, the California issued its opinion in Pineda v. Bank of Am., N.A., __ Cal. 4th __ (2010), on the issues of whether (1) a Labor Code 203 penalty action brought without alleging an underlying wage claim is governed by the one year statute of limitations of CCP 340(a), rather than the limitations period under Labor Code 203(b), which references “an action for the wages from which the penalties arise”, and (2) whether Section 203 penalties, which the statute itself identifies as a continuation of “wages”, may be recovered as restitution under the UCL. The Court resolved both issues in the negative.

With regard to the first issue, the Court reasoned that an interpretation of section 203(b) which would condition the application of the 3 year statute for wages on the concurrent filing of an underlying wage claim was not reasonable construction of the language of Section 203(b), and would “lead to unwieldy and inconsistent results”, inlcuding (1) rendering it impossible to know what statute of limitation governed at the time a Section 203 claim accrued, and (2) permiting the anomalous situation of an employer escaping Section 203 liability altogether by waiting a year to pay unpaid wages. Slip Opinion, at 5-10.

Moreover, the Court deemed such a construction contrary to the important public policy objective underpinning Section 203 penalties, which is to prevent injury to the “public at large” in addition to the individuals affected:
Finally, as we have acknowledged on multiple occasions, "[t]he public policy in favor of full and prompt payment of an employee's earned wages is fundamental and well established" and the failure to timely pay wages injures not only the employee, but the public at large as well. (Smith, supra, 39 Cal.4th at p. 82.) We have also recognized that sections 201, 202, and 203 play an important role in vindicating this public policy. (Smith v. Rae-Venter Law Group (2002) 29 Cal.4th 345, 360.) To that end, the Legislature adopted the penalty provision as a disincentive for employers to pay final wages late. (See BLS, 20th Biennial Rep.: 1921-1922, supra, p. 36.) It goes without saying that a longer statute of limitations for section 203 penalties provides additional incentive to encourage employers to pay final wages in a prompt manner, thus furthering the public policy.
Slip Opinion, at 12-13.

Based on these considerations, the Court concluded “there is but one reasonable construction: section 203(b) contains a single, three-year limitations period governing all actions for section 203 penalties irrespective of whether an employee's claim for penalties is accompanied by a claim for unpaid final wages.” See id., at 10, 13.

With regard to the Second issue, the Court concluded Section 203 penalties are not restitutionary in nature for purposes of the UCL because they are not “earned” wages within the meaning Labor Code 200, but rather wages which an employee is entitled to recover to punish an employer’s inaction when failing to pay “earned” wages when the become due:
[P]ermitting recovery of section 203 penalties via the UCL would not "restore the status quo by returning to the plaintiff funds in which he or she has an ownership interest." (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1149.) Section 203 is not designed to compensate employees for work performed. Instead, it is intended to encourage employers to pay final wages on time, and to punish employers who fail to do so. In other words, it is the employers' action (or inaction) that gives rise to section 203 penalties. The vested interest in unpaid wages, on the other hand, arises out of the employees' action, i.e., their labor. Until awarded by a relevant body, employees have no comparable vested interest in section 203 penalties. We thus hold section 203 penalties cannot be recovered as restitution under the UCL.
Slip Opinion, at 13-15.

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