On February 27, 2012, in Thurman v. Bayshore Transit Management, Inc., the California Court of Appeal affirmed a trial court's award of underpaid "wages" – i.e., premium payments for violations of California's meal and rest period laws and regulations – as a penalty under California Labor Code section 558. The Court of Appeal also held that such underpaid wages may also be recoverable under California's Private Attorneys General Act of 2004 ("PAGA").

In The Trial Court

Thurman was filed as a representative PAGA action. The operative complaint alleged two causes of action involving the employer's alleged failure to comply with California's meal and rest period requirements. The first was based on the theory that the employer's meal and rest period practices violated the Labor Code and the applicable Wage Order. The second cause of action, which was based on the same meal and rest period allegations, claimed that the employer had engaged in unfair business practices in violation of California's Unfair Competition Law ("UCL"), based on the same violations.

Shortly prior to trial, in light of the California Supreme Court's decision holding that a labor union does not have standing to pursue either unfair competition or PAGA claims, Thurman requested a trial continuance in order to file a motion for class certification. The trial court denied the request.

On the fourth day of trial, Thurman filed a motion for class certification. The trial court denied the motion, but entered a judgment awarding $358,588.22 in civil penalties under PAGA to Thurman and other aggrieved employees, $28,605 in restitution to Thurman under the UCL, and $10,253 to Thurman in prejudgment interest.

The civil penalties award under PAGA included premium pay for missed meal and rest periods as underpaid "wages" (in addition to statutorily prescribed civil "per-pay-period" penalties).

The Court Of Appeal Affirms The Award Of Underpaid Wages As Civil Penalties

On appeal, Bayshore contended that the trial court erred in awarding underpaid wages as a part of the civil penalty provided for under California Labor Code section 558 and recovered on behalf of other aggrieved employees under PAGA.

Section 558 provides that an employer "who violates . . . a section of this chapter or any provision regulating the hours and days of work in any order of the Industrial Welfare Commission shall be subject to a civil penalty." The statute then provides a per-pay-period penalty for initial and subsequent violations. Section 558, however, also indicates that the per-pay-period penalties are "in addition to an amount sufficient to recover underpaid wages" and explicitly states that "[w]ages recovered pursuant to this section shall be paid to the affected employee."

Bayshore contended that Section 558 distinguishes between the recovery of civil penalties and underpaid wages. In sum, Bayshore argued that the underpaid wages recovered were not civil penalties but were in addition to, rather than a part of, the civil penalties provided for by section 558.

The Court of Appeal disagreed. The Court suggested that the proper interpretation of section 558 is that the civil penalty provided in that statute consists of both per-pay-period penalties and any underpaid wages. This conclusion was supported by dicta within the California Supreme Court's decision in Reynolds v. Bement, in which the Supreme Court stated that section 558 may subject employers to "a civil penalty, payable to the affected employee, equal to the amount of any underpaid wages."

In applying this conclusion to the PAGA context, the Thurman Court further explained that the inclusion of underpaid wages in the section 558 civil penalty creates an express exception to the general rule that 75% of civil penalties recovered pursuant to PAGA are distributed to the Labor and Workforce Development Agency ("LWDA"), while the remaining 25% is distributed to the aggrieved employees. Again, the Thurman Court turned to Reynolds to support its conclusion and noted that the concurring opinion in Reynolds indicated that PAGA "in time, may provide workers with a mechanism for recovering unpaid overtime wages through private enforcement of section 558, which authorizes civil penalties for violations of the wage laws that include unpaid wages."

The Court also noted that Bayshore's argument that underpaid wages are not a part of section 558's penalty would necessarily imply that the LWDA, which is authorized to collect civil penalties on behalf of aggrieved employees, may not recover underpaid wages. The Court rejected this reasoning and concluded that the Legislature authorized the LWDA to recover underpaid wages as a section 558 civil penalty. As a result, because employees pursuing claims under PAGA are acting as proxies for the LWDA, employees pursuing section 558 civil penalties pursuant to PAGA may recover any underpaid wages as a civil penalty.

What Thurman Means For Employers

Unless and until the issue is clarified by the California Supreme Court, Thurman is a troubling development for employers facing PAGA claims. The decision seems to incentivize employees with meal and rest period claims to pursue stand-alone PAGA claims. This is because PAGA does not provide prevailing employers a means of recovering attorney's fees, thereby enabling employees to avoid the risk of paying prevailing employers' attorney's fees pursuant to California Labor Code section 218.5, while still recovering underpaid wages.

This decision reignites confusion regarding the nature of premium wages for meal and rest period violations. Although the California Supreme Court has held that such payments are "wages" for statute of limitation purposes, the Thurman Court's opinion suggests that the determination of whether premium wages for meal and rest period violations are penalties or wages is contextually dependent. Such a determination may result in longer limitation periods being available to employees to recover on such claims, thereby exposing employers to greater potential liability.

By: Simon L. Yang

Simon L. Yang is an associate in Seyfarth's Los Angeles office. If you would like further information, please contact your Seyfarth attorney or Simon L. Yang at syang@seyfarth.com.