The California "Multiplier Effect": How Small Wage and Hour Violations Create Big Class Settlements in California

Employers sued in California wage and hour class actions are all too familiar with the State’s “multiplier effect.”  What is the California “multiplier effect,” you ask? Simply put, it is a small wage payment violation (e.g., for non-payment of overtime hours or off-the-clock work), that can trigger a range of penalties under the California Labor Code far exceeding the value of the original unpaid wage amount. In wage and hour class actions, minor wage violations can cost employers millions.

The following example illustrates the concept. Let’s say that an assistant store manager for a retail store has been misclassified as exempt from state overtime pay requirements. The employee worked for the employer for about a year, and worked approximately two overtime hours each week. For unrelated reasons, the employee then quits his or her job without notice.

Several months later, the employee sues the employer, seeking payment for 100 overtime hours. However, because the employer had not paid the employee for all overtime hours worked at the time of the employee’s termination, the employee can also seek “waiting time” penalties under California Labor Code section 202. California Labor Code sections 201 and 202 require California employers to pay all wages earned within strict time periods from the date of the employee’s termination. Under California Labor Code section 203, for each day payment of final wages is delayed, employees are entitled to one day of wages, up to a maximum of 30 calendar days.

Further, the employee will also seek penalties for violations of California’s wage statement requirements. Labor Code section 226 requires employers to include nine categories of information on an employee’s pay check stub. The categories include gross wages, deductions, the number of hours worked, and applicable rates of pay. The information must be accurately stated. Violations of Labor Code section 226 result in the greater of: (i) actual damages to the employee, or (ii) penalties, up to a maximum of $4,000. In our example, the employee’s gross wages, hours of work, and rates of pay would not be accurately stated on the pay check stubs because the employee was not paid for several hours of overtime each week. Additionally, hours worked and corresponding rates of pay were likely omitted because the employee was classified as an exempt employee. These pay check stub violations could result in an additional $4,000 in penalties per employee.

In our example, the employee will also seek penalties for violations of California’s “pay day” requirements. Under Labor Code section 204, California employers are required to pay non-exempt employees on designated pay days at least twice per calendar month. Overtime wages must be paid no later than the payday for the next regular payroll period following the payroll period in which the overtime wages were earned. Although California Labor Code section 204 does not expressly provide for civil penalties, penalties can be obtained under California’s Private Attorneys General Act. PAGA, as the law is known, provides monetary penalties in the amount of $100 per employee per pay period, and $200 for subsequent pay periods, including attorneys’ fees, for violations of the California Labor Code where none otherwise exist.

As a misclassified exempt employee, the employee will also likely seek “premium wages” for meal and rest period violations. Under California Labor Code section 512, non-exempt employees may not work more than five hours in a workday without being provided a 30 minute, duty free meal period. Additionally, employers must provide non-exempt employees with a 10 minute rest period for every four hours worked (or major fraction thereof). Rest periods are paid. Employers that fail to provide required meal and rest periods must pay employees a one hour “premium wage” at the employees’ regular rate of pay.

California employers continue to try to minimize the impact of “multiplier effect” by taking a number of practical steps. “Attestation forms,” in which employees attest, on a regular basis, to recording accurately all hours worked, and taking all required rest and meal periods are being utilized with more frequency. Arbitration agreements with class action waivers, while more difficult to enforce in light of recent California case law, continue to be used with frequency. Likewise, employers unfamiliar with California wage and hour law are frequently utilizing experienced California employment counsel to conduct wage and hour audits. With these efforts, employers can mitigate some of the harsh effects of California’s wage and hour laws.

Note: This article was published in the July 2008 issue of the Class Action eAuthority.