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State's high court throws businesses for loss

Employers can now be held liable for up to three years -- and in some cases even four -- for failing to provide proper meal and rest-period breaks to its employees, according to a California Supreme Court ruling Monday.

In a highly anticipated decision, the seven justices ruled unanimously the remedy for violating the state's meal- and rest-period statute -- "an additional hour of pay" -- is considered a wage and not a penalty, increasing the statute of limitations to three years.

"There's no good in this opinion for employers," said Jeremy Roth, managing partner of the San Diego office of employment firm Littler Mendelson. "It's not one where you can say, 'But the silver lining is ...' This is just a loss for employers."

California labor code requires employers to give their nonexempt (hourly) workers at least a half-hour meal break for every five hours of work and at least a 10-minute rest period for every four-hour shift. Workers are entitled to one hour's pay at their regular hourly rate for every break they don't get.

The courts have struggled to define the additional hour of pay as a penalty or a wage, a crucial difference because the statute of limitations on a penalty is only a year while for a wage it's three years. The statute of limitations for an unfair competition claim arising from the same issue is four years.

"This is a big decision, and it's a tough, tough decision for employers," said employment attorney Craig Hunsaker, managing partner of the San Diego office of Mintz Levin Cohn Ferris Glovsky & Popeo. "It is (now) a much more daunting complaint to deal with as an employer, and you can't ignore the fact that it adds much more incentive to the employment plaintiff's bar as if they didn't have incentive enough."

The convincing 7-0 vote surprised many local observers who had been intently following the case, Murphy v. Kenneth Cole Productions.

"I watched oral arguments in the case and several of the judges were very active in their questioning," said San Diego attorney Rick Bergstrom, co-chair of the employment and labor practice group with Morrison & Foerster. "It seemed to be telegraphing that some (justices) were clearly in favor of the premium being a penalty and some clearly in favor of it being a wage."

The state high court's decision centered on the definition of pay, which is the word used in the applicable statute, and legislative intent. Webster's defines pay as money given services rendered, which the justices determined means pay. They also contended if lawmakers had intended the statute to be a penalty, they would have used the word "penalty."

The justices even looked at a previous version of the statute, which featured the word penalty before it was deleted.

"They felt that legislators strongly intend for this to be wage," Bergstrom said.

Employer groups argued the Industrial Welfare Commission had opined the additional hour of pay was a penalty. That same group, however, had reached the opposite conclusion while under Gov. Gray Davis.

"The court said it's a political shift and were not going to give any weight to that (latest) interpretation," Hunsaker said.

The decision could affect a case against Wal-Mart (NYSE: WMT), in which the giant retailer was ordered by a jury to pay $172 million, including $115 million in punitive damages, for not providing workers rest- and meal-period breaks.

In its current appeal, Wal-Mart argues you can't place punitive damages on top of a penalty, which is what they contend the break period violations are. Monday's decision contradicts that argument.

"This case undermines Wal-Mart's argument, but it doesn't resolve the argument completely," Bergstrom said. "It's still unresolved whether you can recover punitive damages based on a violation of the labor code."

But now the additional hour has been determined to be a wage, Hunsaker said the prevailing parties can recover attorney's fees, receive pre-judgment interest and claim waiting-time penalties.

"Looking back, the liability is much greater for employers who accused of violating meal-time and rest-period laws," Hunsaker said.

Employers, however, still need to apply the same safeguards to ensure their workers are taking the proper meal- and rest-period breaks.

"All of the defenses and strategies still exist in dealing with any (wage and hour) class-action case," Roth said. "You'll just be fighting over a lot more money. The stakes are much higher."

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