Client Alerts

Termination Pay Penalties: Easy to Incur, Impossible to Reduce?

05/30/2018

Seyfarth Synopsis: Employers must pay “waiting time” penalties for willfully failing to timely pay wages due upon termination. Last week the California Court of Appeal dealt employers a double whammy: (i) mere negligence can count as “willfulness,” and (ii) courts lack statutory discretion to reduce the penalties, which can add up to 30 days of wages.

The Facts

In April 2014, three restaurant workers sued Grill Concepts Services, Inc. on behalf of terminated restaurant employees. They said that Grill Concepts failed to pay living wages under a Los Angeles ordinance and thus failed to pay wages due upon termination. They sought waiting-time penalties under Labor Code section 203—penalties that can amount up to 30 working days of wages. Grill Concepts had paid the living wage required by the original ordinance, but had overlooked a 2010 amendment. The Grill Concepts HR director suspected the restaurant was underpaying employees when she saw an article citing a living wage higher than what Grill Concepts was paying. After hearing from the City that the amendment to the ordinance was still “in process,” Grill Concepts continued searching the City’s website to see if the ordinance had been amended, however, Grill Concepts did not follow up with the City or ask other affected employers about what living wage they were paying.

The trial court certified a class and granted summary judgment against Grill Concepts for Section 203 penalties because its failure to pay was “willful” within the meaning of the statute. At trial, the trial court found that it lacked equitable discretion to waive the penalties for equitable reasons. Grill Concepts appealed.

The Court of Appeal’s Decision

Grill Concepts told the Court of Appeal that its failure to timely pay termination wages was in good faith, in that it could not find the amended ordinance. The Court of Appeal rejected this argument, stating that employers have a “duty of inquiry” to determine whether their conduct is unlawful. The Court of Appeal reasoned that the employer’s ignorance coupled with its negligence in failing to determine the proper living wage amounted to a “willful” failure to pay. The Court of Appeal similarly rejected Grill Concepts’s second argument that failing to understand the ordinance constituted a good faith dispute. The Court of Appeal held that the ordinance was not impermissibly vague, because a reasonable and practical construction was possible, and a person of ordinary intelligence would understand the annual adjustments to the living wage in accordance with the 2010 amendment.

The Court of Appeal further held that Section 203 does not empower courts to reduce or waive penalties for equitable reasons. The Court of Appeal based its analysis on the statutory language, which states that wages “shall” continue as a penalty if the employer fails to timely pay final wages. The Court of Appeal noted that the Legislature could have included discretionary language, but chose not to do so. The Court of Appeal reasoned that it would be impermissibly creating an exception to the statute if it recognized judicial discretion to reduce or waive penalties. From a policy standpoint, the Court of Appeal asserted that the penalties were “essential to the public welfare” because employees depend on wages for life necessities and that allowing discretion to reduce or waive penalties would undermine the statute’s purpose of prompt payment.

What Diaz Means For Employers

Diaz is another stark reminder of how California courts deal harshly with employers, even when they have made an effort to comply with the law. Employers must stay vigilant about their wage obligations or risk a finding of willfulness if a failure to exercise care results in the underpayment of wages. Diaz confirms that the mandatory “shall” language in Section 203 is just that—mandatory—and requires the imposition of penalties if there is a finding of willfulness related to underpayment of wages.

It is also true, though, that Diaz does not address constitutional issues attending harsh and oppressive applications of Section 203. In some cases the amount of the penalty—30 working days of wages—will dwarf the magnitude of any violation. In those cases the disproportionate penalty could amount to a constitutionally excessive fine. Diaz, meanwhile, addresses only whether courts have “equitable” power under the statute to reduce penalties. We do not believe that applying the statute’s “shall” language would survive a constitutional challenge in an extreme case.