In a decision of great interest to California employers, the California Supreme Court yesterday agreed to settle the dispute among California’s Courts of Appeal regarding whether the “payment” of one hour’s pay at the employee’s usual rate for a missed meal and/or break period mandated by California Labor Code §226.7 is a “wage” subject to a three- or four- year statute of limitations or a “penalty” subject to a shorter one-year statute of limitations.

The Supreme Court granted review in the case of Murphy v. Kenneth Cole Productions, Inc., a case involving misclassified store managers that included claims for meal and rest period payments pursuant to Labor Code § 226.7. The appeal was taken from the December 2, 2005, decision of California’s First Appellate District Court, which held that the payment to these managers for missed meal periods was a penalty, not a wage. The Supreme Court’s decision to grant review will resolve the question and provide binding authority as to the treatment of this payment for all California courts.

The Court of Appeals’ Kenneth Cole decision appeared to be in line with the decisions of California’s Courts of Appeal and of the DLSE that preceded it, all of which had viewed the payment as a penalty. In June 2005, the California Labor Commissioner designated as a precedent decision the finding in Hartwig v. Orchard Commercial, Inc. that held that the payments sought by an individual employee for missed meal or rest periods under Labor Code section 226.7 constitute a penalty. In November 2005, the Second Appellate District Court decided that the payment was a penalty in the case of Caliber Bodyworks v. Superior Court, citing the Hartwig decision as authority for its conclusion that “[a]lthough section 226.7 does not expressly label this payment a ‘penalty,’ it is in the nature of a statutory penalty because it requires the employer to pay more than the value of the missed meal or rest period. The section 226.7 payment does not compensate the employee for any extra time worked but rather punishes the employer for its failure to provide the meal or rest period mandated by the IWC.”

However, in the post-Kenneth Cole period, California’s Fourth District Court of Appeals has diverged from the Caliber Bodyworks and Kenneth Cole line of decisions. In National Steel & Shipbuilding v. Godinez (“NASSCO”), decided on January 20, 2006, the Fourth District found that the payment was both a wage and a penalty, and chose to subject the employer to the longer statute of limitations. This does not appear to have heralded a reversal in California’s general trend, however, as just one week later the Second District Court of Appeals held, in the case of Mills v. Superior Court, that the payment was a penalty: “[t]he failure of section 226.7 to correlate the payment due to any additional labor performed by an employee undermines any argument the payment is a wage.”

The confusion regarding the nature of the 226.7 payment is compounded by California’s precedent rules, which do not require California trial courts to follow the rulings of the Courts of Appeal presiding over their districts. In the event of a split of authority among appeals courts, all California trial courts may consider the rulings of all appeals courts in rendering a decision in an individual case. The split of authority, then, has made it virtually impossible for employers to predict with certainty what statute of limitations will be applied by any individual trial court, even when the appeals court for that district has repeatedly decided the issue. The Supreme Court’s decision in Kenneth Cole, which will be binding authority on all California courts, will provide a final resolution to this important issue for all California employers. The weight of past authority certainly seems to cut in favor of the one-year statute of limitations, but it remains to be seen how the Supreme Court will evaluate the arguments.