On November 18, the California Supreme Court in Pineda v. Bank of America, No. S170758 (Cal. Nov. 18, 2010) (pdf) clarified two issues regarding so-called “waiting time penalties” (i.e., penalties under California Labor Code Section 203 associated with the late payment of final wages upon termination of employment). First, the Court ruled that a three-year statute of limitations applies to such actions, whether or not accompanied by a claim for the underlying late wages. Second, it held that waiting time penalties are not recoverable as restitution under California’s unfair competition law, Business and Professions Code Section 17200 (the “UCL”). While the latter ruling is marginally beneficial to employers by limiting liability under the UCL, the Court’s finding of a three-year statute of limitations for waiting time penalties dramatically expands potential employer liability.

Pineda received his final wages four days after the termination of his employment with Bank of America, thus creating potentially four days’ worth of waiting time penalties. Eventually, Pineda brought a class-action lawsuit against Bank of America for recovery of such penalties, but he did not file the action until more than a year later. Bank of America conceded that a three-year statute of limitations applies when an employee sues for both unpaid wages and penalties under Section 203, but argued that the default one-year statute of limitations on penalty claims (Code of Civil Procedure Section 340) applies to an action, such as this, where only waiting time penalties are sought. Although the trial court and the Court of Appeal agreed with Bank of America, the Supreme Court of California reversed, holding that the three-year statute of limitations, which ordinarily applies to the recovery of wages, applies to all actions brought under Labor Code Section 203, irrespective of whether an employee’s claim for penalties is accompanied by a claim for unpaid final wages.

The Court then turned to the question of whether Section 203 penalties are recoverable as restitution under the UCL. The Supreme Court reversed the Court of Appeal and determined they are not. It ruled that unlike wages, which are recoverable as restitution, penalties are not designed to compensate employees for work performed. Instead, they are intended to encourage employers to pay final wages on time, and to penalize those employers who do not. As such, a penalty is not a restitutionary measure.

For employers, Pineda is a mixed bag. On the one hand, the Court has shielded employers from additional restitutionary penalties for the late payment of final wages under the UCL. On the other, the Court has increased employers’ exposure to these late payment lawsuits by finding the limitations period for these claims to be three years instead of one. In light of this holding, employers would be well-advised to consult counsel to ensure that they have procedures in place for the timely calculation and delivery of final wages.