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Wal-Mart's $172 million lunch tab: A lesson for all California employers

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Late last year, an Alameda County jury dealt the world's largest retailer a major blow by awarding $172 million to approximately 116,000 current and former employees in California.

Zilberman

What justified one of California's largest verdicts in 2005? Did Wal-Mart (NYSE: WMT) violate child labor laws? No. Did Wal-Mart spill toxic waste into the environment? No. Wal-Mart's crime was illegally depriving employees of lunch breaks.

The verdict included $57 million in compensatory damages and $115 million in punitive damages. During the trial, plaintiffs argued that employees were regularly denied lunch and dinner breaks, and some employees testified that they were pulled away from their breaks early to make up for staff shortages.

While Wal-Mart will appeal the verdict and the amount will likely be reduced or the case will be settled for a substantially smaller amount, the case sent a message to Wal-Mart and all other California employers that it is not acceptable to deprive hourly employees of 30-minute duty free meal breaks.

The size of the verdict, as well as the media attention it generated, should be a wake-up call to all California employers about complying with the rigid and technical provisions of California's wage and hour laws. California employers should also take note of Wal-Mart's errors because the verdict will likely result in an escalation of class action lawsuits alleging similar violations against much smaller employers.

In order to better put the Wal-Mart verdict in perspective, some background information on California's unique lunch law is necessary. In 2000, changes to California's overtime provisions ushered back the "8-hour daily overtime" rule and imposed a variety of other changes, including penalties for violating meal and rest period provisions. One change occurred in California Labor Code section 512, which states:

* Employers must provide non-exempt employees who work more than five hours per day a duty-free unpaid meal period of at least 30 minutes;

* If the employee works no more than six hours, the employee and employer may waive the meal period by mutual consent;

* If the employee works more than 10 hours, a second unpaid meal period of at least 30 minutes must be provided; and

* If the employee works no more than 12 hours, the employee and employer can mutually waive the second meal period if the first meal period was not waived.

There are certain exceptions that apply to employees working under a collective bargaining agreement and in certain industries, such as motion pictures and baking. However, the basic law has now been on the books for five years and is still misunderstood by a vast number of employers who get sued and routinely settle class action cases brought for violations of the meal period rules.

Importantly, the meal break provisions specifically give time deadlines of when a meal period needs to be taken. The code section states that an employee cannot work "for a period of more than five hours per day without ... a meal period of not less than 30 minutes."

The Department of Labor Standards Enforcement ("DLSE"), the state agency charged with enforcing California's wage and hour laws, has taken the position that this means that employees must begin and complete their meal period before they complete five hours of work.

When employees fail to take timely meal breaks, miss a meal break or if the break is not completely duty free (when an employee eats lunch at their desk while continuing to work) the law provides that employers must pay them an additional hour of pay, at their regular hourly rate.

From an evidentiary standpoint, meal period cases are fairly easy to prove because a judge or jury need only look at an employee's time card to determine if the meal period was given, if it was timely, and if it lasted the appropriate amount of time.

Unfortunately for Wal-Mart, its own documents showed that employees were not given their required meal breaks and that executives knew the company was "aware of the violations" since 2001 but failed to do anything to correct the problem. That's another problem many California employers share. Namely, how to monitor if employees are not taking their meal period and how to ensure to compensate for missed, late or shortened meal breaks.

As a practical matter, currently, employers are required to force employees to take a meal break (whether or not the employee wishes to take a break) or risk a one-hour pay penalty for a meal period violation. Perhaps the simplest way to solve this problem is for employers to schedule meal breaks, as part of the weekly or daily schedule.

Also, employers should periodically audit employee timecards to ensure compliance with the law.

Finally, employers should pay the one-hour penalty when they find a meal period violation and also impose discipline on those employees that continually fail to follow the rules.

For its part, Wal-Mart has since adopted new technology that sends electronic alerts to cashiers when it is time for their meal breaks and cash registers automatically shut down if cashiers don't respond.

One of the reasons for the extremely large Wal-Mart verdict and a reason that meal period claims have been the lawsuit "de jour" for many class action lawyers is because the law has been ambiguous as to whether the extra hour of pay for each meal period violation was a "penalty" or a "wage."

The answer was the difference between employees recovering damages going back one year (for a penalty) or going back up to four years (for a wage). Depending on a court's decision on this issue alone, the potential per-violation, per-employee liability could be staggering for an employer with even a modest workforce.

That's why many California employers breathed a sigh of relief when shortly before Christmas and the Wal-Mart verdict, a California Court of Appeal's opinion held that the "one hour of pay" remedy for meal and rest period violations in the Labor Code "is a penalty," not wages. Thus, meal break claims have a one year, rather than four year, statute of limitations.

Interestingly, the Court of Appeal's decision was not a class action case even though it was the first ruling on this critical issue from a California state appellate court.

While the plaintiff in the decision has already filed an application for review by the California Supreme Court, and other California appellate courts are not bound by the ruling, the importance of the opinion cannot be overstated.

This opinion gives employers a much stronger negotiating posture when attempting to resolve meal break cases, as most of these cases are settled through mediation rather than trial.

However, this case should not be viewed as a cure-all decision, because the court also stated, for example, it would not decide whether multiple penalties can be awarded for daily violations, and did not decide whether employers have an affirmative duty to ensure employees are taking meal breaks.

As we enter 2006, the simple truth is that California continues to have some of the most rigorous and Byzantine wage and hour laws in the country. Wal-Mart found itself caught, apparently, violating meal break rules that are peculiar to California.

In order to help avoid Wal-Mart's fate, prudent employers should conduct thorough reviews of their employment law compliance practices. Given the enormous liability involved, coupled with the significant cost of defending such class actions, these reviews should be done in conjunction with counsel utilizing attorney-client privilege and the attorney work product doctrine as appropriate.


Zilberman is a partner at Wilson Petty Kosmo & Turner LLP in San Diego. He specializes in all aspects of employment law, including class action litigation, exclusively on behalf of management.

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