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Waiting Time Penalties: Ignorance of the Law Won't Get You Off the Hook

Thursday, July 26, 2018

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Employers in California can be penalized if they fail to timely pay an employee who quits or is terminated. These penalties are referred to as “waiting time” penalties. Labor Code section 203 states that if an employer “willfully” fails to pay all wages due to an employee at the time of termination (or within 72 hours if the employee quits without notice), the employer owes that employee one day’s pay for every day that the final paycheck is late, up to 30 days.

These waiting time penalties apply not only when an entire final paycheck is late, but also when the check is not for the full amount of wages due. And a California court of appeal has now clarified that failure to pay all wages can be considered “willful,” triggering waiting time penalties — even when the paycheck shortage is due to the employer’s lack of awareness of local wage requirements.

Paying a Living Wage

In 2007, the city of Los Angeles established an “Airport Hospitality Enhancement Zone” to support businesses located near Los Angeles International Airport (LAX). The city pledged to market those businesses, provide employee training, subsidize some power rates, and upgrade nearby streets and sewers. In exchange, the city required “hotel businesses” within the zone to pay employees a “living wage” — which is higher than the state minimum wage.

In 2010, Grill Concepts, Inc. opened the Daily Grill restaurant inside the Westin Hotel near LAX. Because they worked in the hotel, Daily Grill employees were covered by the living wage ordinance. Although the Daily Grill initially paid its workers consistent with the ordinance, it failed to increase the living wage pursuant to city requirements.

In 2014, three Daily Grill employees sued Grill Concepts for failing to pay the required living wage. In addition to unpaid back wages, the employees asked for waiting time penalties for workers who terminated employment in the previous four years — because workers were underpaid for years, final paychecks could not have included all owed wages.

Grill Concepts immediately repaid all back wages owed to current and former employees. But the employer argued that it shouldn’t have to pay waiting time penalties (which amounted to nearly $270,000) because its failure to issue full final paychecks was not “willful.” It claimed that it didn’t intend to underpay employees — it simply was unable to find or understand the information about annual living wage increases in the hospitality zone ordinance.

What Constitutes “Willful”

The court defined “willful” as an intentional failure or refusal to perform an action. It stated that an employer needn’t have a malicious purpose or intention to defraud workers — simply that the employer knew what it was doing.

Failure to issue a final paycheck is not willful when:

• The law is uncertain;

• A government authority represents that no further wages are due; or

• There’s a good faith dispute as to whether wages are owed. This factor may relieve the employer of the obligation to pay waiting time penalties even if the employer was mistaken and wages were actually due.

Grill Concepts argued it shouldn’t have to pay waiting time penalties because a good faith dispute existed as to whether wages were owed. Grill Concepts claimed:

• It couldn’t find information in the ordinance about the required wage increases; and

• Even if it found that information, the ordinance was unconstitutionally vague and confusing.

The court disagreed on both accounts and rejected the good faith argument.

First, the court noted that Grill Concepts suspected as early as 2010 that it was underpaying its employees. That year, the restaurant’s HR director read a newspaper article about the living wage ordinance and believed that Grill Concepts was underpaying its workers. She contacted outside counsel who, in turn, called the City Attorney’s Office. The city attorney stated that an ordinance update was in process, but no one from Grill Concepts ever followed up to see what the new living wage rate was.

Noting that “ignorance of the law is no excuse,” the court said that businesses have a duty to inquire as to whether they are acting legally. The court held that Grill Concepts acted below this standard of care, and should have tried harder to learn about the correct wage rate. Grill Concepts’ inability to find specific information in the ordinance didn’t make its wage payment failure “innocent.”

Second, the court held that the ordinance was not so vague as to create a good faith dispute about the amount owed to employees at the time of termination. Although the ordinance didn’t actually set future increases — it referred employers to the amount set in an annual Bureau of Contract Administration bulletin — the court found that it was simple enough for employers to “connect the dots” and adjust wages accordingly.

Additionally, the court noted that no evidence was presented of other covered employers having trouble understanding the ordinance and paying employees appropriately. It affirmed the trial court’s judgment and ordered Grill Concepts to pay waiting time penalties to terminated employees who didn’t receive their full final paycheck amounts.

Lessons for Employers

• Pay all wages due at the time of termination or within 72 hours of a resignation without notice.

• If you pay a terminated employee late, always add in one day of wages for every day the check is late. Even if circumstances were outside of your control and you didn’t “intend” to pay an employee late, you will generally owe waiting time penalties.

• Many California municipalities have implemented local minimum wages or living wages that have regularly scheduled increases. It’s every employer’s responsibility to determine which local wages apply to their businesses and ensure that they pay employees correctly.

• It’s very difficult to prove that an ordinance is unconstitutionally vague. An employer should never presume that it isn’t subject to an ordinance even if its scope is somewhat unclear. If you’re unsure whether a law applies to your business or if you’re following a law correctly, consult with legal counsel.

Source: HR California

Category: Chamber News, Member News, Partner News, Workforce Development

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