Waiting Time Penalties; the ‘Wage and Hour’ Part of Terminations Which Employers and Employees May Not Think About (and Should Think About)

When an employee is terminated, what are the concerns, phrases and legal questions – – from either the employer or the terminated employee – –  which come to mind first?  Most likely “Wrongful termination”, “Discrimination”, or “Hostile Work Environment”  (or in our present economy perhaps “Unemployment Benefits”).  This is because there has been a great deal of litigation between employers and terminated employees over the employer’s right to terminate private sector, at-will employees for no reason at all versus the statutory rights of employees within certain protected categories.  But both employers and employees should keep in mind, however, a much more basic point associated with terminations: Make sure that all wages and benefits are paid to the employee at the time he or she walks out the door.

Why is this important to California employers (and employees)?  Because section 201 of the Labor Code provides that “If an employer discharges an employee, the wages earned and unpaid at the time of discharge are due and payable immediately.”  While ‘immediately’ can mean, for certain specific exceptions, ‘within 72 hours’, in most cases ‘immediately’ means ‘at the time the terminated employee is walking out the door’ (so yes employers, terminations must be planned to allow for payroll services to generate the last check).  It is also important to note that the “wages” which must be provided upon termination of an employee (or when an employee quits) include any accrued benefits, such as accrued or earned vacation or sick time hours (if provided by the employer).

What happens if employers do not comply with this section 201 requirement?  Section 203 of the Labor Code provides that if an employer willfully fails to provide the wages due to an employee who is terminated (or who quits), the wages “shall continue as a penalty from the due date thereof at the same rate until paid or until an action therefor is commenced; but the wages shall not continue for more than 30 days.”  Such wages are called ‘waiting time penalties’, and can often become much more significant than the amount of any wages due to a terminated employee.

Example: employer A terminates employee B who makes $ 20/hour and fails to provide one hour of earned pay ($ 20) to this employee on the day the employee is fired and leaves the office for the last time.  More than a month goes by before the employer realizes this $ 20 is owed, or before the employee files a complaint with the CA Labor Commissioner or files a civil action (or small claims court action) for this $ 20.  Separate from the $ 20 in wages, the waiting time penalties which the employer must pay to the employee will be $20/hour x 8 hours per work day x 30 days = $ 4,800.00.  The failure by the employer to provide the last $ 20 earned upon firing this employee now costs the employer almost five thousand dollars.  This is not what may happen; this is what will happen if all wages are not provided on the day of termination – – unless the employer can establish the ‘good faith’ defense that the failure to provide the pay was not “willful.”

What does “willful” mean under CA Labor Code §203?  The Courts which have addressed this are somewhat ‘split’ on what an employer must show to establish the ‘good faith’ defense to their failure to provide all wages due upon termination.  For example in Barnhill v. Robert Saunders & Co., (1981) 125 Cal. App.3d 1, the Court held that an honest dispute between the parties, or uncertainty on the part of the employer, as to the amount of unpaid wages due, constituted the good faith defense such that the waiting time penalties were not due.  More recently, the Court in Amaral v. Cintas Corp. (2008) 163 Cal.App.4th 1167 first declared the established standard for what is “willful” under section 203 as “an employer has intentionally failed or refused to perform an act which was required to be done; the employer’s refusal to pay need not be based on a deliberate evil purpose”,  and then clarified that the employer did not have to possess the ‘good faith’ defense at the time the employee was terminated, but rather “Precisely when the employer formulated such a defense is…beside the point. So long as no other evidence suggests the employer acted in bad faith.”

Other Courts have held that much less is required for the employee to show that the employer did act “willfully” such that waiting time penalties are due.  The Court in Armenta v. Osmose, Inc. (2005) 135 Cal. App. 4th 314 held that “willful” under Labor Code section 203 merely means that the employer intentionally failed or refused to perform an act which was required to be done. The Armenta Court went on to note that even though the law at issue in that case was somewhat unsettled, the evidence showed that the employer was aware the employee were not being provided with all the wages due. 

While what is “willful” and makes the waiting time penalties due is not defined under the law in black and white terms, employers should not assume their decisions will not be found “willful”, and instead should make every effort to provide all earned wages or accrued benefits to a terminated employee (or to an employee who quits) at the time they ‘walk out the door’.  Otherwise the amount paid in waiting time penalties may greatly exceed the amount of disputed wages due.