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The Hidden Wage Penalty – Labor Code Section 203

Unless  you have had the misfortune of being sued by your employee on a wage claim, this will likely come as a surprise. If you are even a day late in paying wages to the employee you just terminated or who quit, you will owe a “penalty” on top of the wages due.  The penalty can be up to 30 days’ wages.  That’s right 30 days’ wages even if you owe just $1.

Time To Pay Wages On Termination

If you terminate an employee, all final wages are due immediately upon termination (Labor Code section 201).  If your employee quits, you have 72 hours to make sure they receive their final wages with one exception: if the employee gives you more than 72 hours notice of the resignation, their final wages are due at the time of quitting, i.e. last day worked.  (Labor Code section 202).  Final wages includes accrued and unused vacation time and any other form of wages due.

The Penalty

The penalty is one day’s wages for every day you are late, up to 30 days (Labor Code section 203).  The clock stops ticking once the employee files “an action.”  Filing a claim with the Division of Labor Standards Enforcement (DLSE for short), the Labor Commissioner’s enforcement arm, is not considered “an action.”  Thus unless you have paid all final wages on time or within 30 days, you are likely to owe a full 30 day penalty once the employee files their wage claim.

Now the penalty only applies for a “willful failure” to pay wages.  We know what you are thinking.  Yes, there are some angles.  But they are limited, and you should assume if the “wage” was owed, but not paid, that is “willful.”  Inability to pay and ignorance of the law won’t cut it.

Calculation of the Penalty

To calculate the penalty take the wage rate and average hours worked per day (max 8 hours) and multiply the hourly wage rate times average hours per day times 30 days.  Example: If the employee is paid minimum wage ($8/hour as of 2008) and works 8 hours per day, the daily penalty is $8 x 8 hours = $64.  A 30 day penalty is $64 x 30 days = $1,920.  The hourly rate to apply can become more  complicated when different types of pay, such as bonus, flat rate, commissions, prevailing wage rate, is involved.

The Tail Wagging The Dog

In our experience, the amount of Labor Code section 203 penalties can be significant and sometimes far exceed the actual wages due.  Consider the following scenarios based on real life:

Scenario 1:  Housekeeper for small motel franchise is paid $10 hour and works 8 hours a day.  Employee claims to have missed a couple of rest or meal periods each week during the 5 weeks of his total employment.  Employer learns this for the first time when she receives the wage claim filed by employee with the DLSE.  No complaint prior, but employer doesn’t have basic rest/meal period policy/documentation under Brinker Restaurant in place and employer realizes after the fact employee never clocked out for the meal period(s) allegedly missed.  Wage claim is for $100 (2 rest/meal periods missed x 5 weeks worked x $10) + LC 203 penalty of  $2,400.  If any of the rest/meal periods are found to be “missed” due to employer fault, employer will owe $2,400 in 203 penalties.

Scenario 2:  Employee is paid $35/hour, has 8 hours of accrued but unused vacation at the time the employer terminates employee’s employment.  Employer pays all hours worked in the final payroll period but forgets to pay the 8 hours of vacation wages due.  Employee files a wage claim with the DLSE 64 days later and claims $280 ($35 x 8 hours) for vacation wages due + $8,400 ($35 x 8 hours x 30 days) for LC 203 penalties.  Employer will owe both.

Scenario 3:  If in either of the above scenarios more than one employee is involved the penalties can be insane.  You can use your imagination.

In our experience our attorneys have encountered much more complex Labor Code section 203 penalty issues, but the recurring theme is often the amount of the penalty is ridiculous in proportion to the wages due.  But unfortunately the penalty is a mathematical formula that allows up to 30 days’ wages as a penalty.

Lessons Learned

  1. Correctly determine all final wages due (not only final hours worked, but vacation, bonus, or forms of wages due).
  2. Pay all those wages “immediately” if you terminate (that means you hand the final check to employee during termination meeting), or within 72 hours for a voluntary quit (exception upon quitting if employee gave more than 72 hours notice of quit).
  3. Have proper policies/documentation for rest/meal periods under Brinker Restaurant in place.
  4. If there is a dispute whether something is final wages or whether the wage has been earned, you probably want to consult a knowledgeable wage and hour lawyer pronto to provide a legal opinion.  Because if the “wage” is later found to be due by the Labor Commissioner or a court, the LC 203 penalty is pretty much automatic.

We advise small and medium businesses to prevent employee lawsuits.  Our monthly flat rate programs are designed to avoid employee claims, and when a lawsuit is absolutely unavoidable, to place its clients in the best possible position to win as soon as possible with the least overall cost.  Please see our monthly flat rate programs for small and medium business.