In a case of first impression, the federal Ninth Circuit Court of Appeals held that a furlough or temporary layoff without a specified return-to-work date within the same pay period constitutes a “discharge” under California law, activating the employer’s duty to immediately pay all wages earned, including vested vacation time. Employers who may be affected by such open-ended shutdowns – whether because of a potential upcoming government shutdown or another round of COVID-19 surges – should especially take note of this decision.

Background

The case – Hartstein v. Hyatt Corp., __ F.4th __, 2023 WL 6167607 (9th Cir. Sept. 22, 2023) – arose from Hyatt Corporation’s decision to temporarily lay off employees in March 2020 due to the slowdown in business caused by the COVID-19 pandemic. The company did not give employees a return-to-work date, but indicated its hope that they would be able to return in eight to twelve weeks. Hyatt continued to pay health benefits during the months of April and May. In June 2020, Hyatt informed employees that their employment would be terminated and they would be paid all unused accrued and earned vacation.

The plaintiff-employees filed a class action lawsuit contending that they should have received final paychecks, including vested vacation, at the time of the initial temporary layoff in March 2020. Hyatt argued that it was not required to issue final paychecks until June 2020, because before that, the employment relationship had not been entirely severed. The District Court granted summary judgment for the employer, but the Ninth Circuit reversed.

The Court’s Decision

Labor Code Section 201 provides that “(a) If an employer discharges an employee, the wages earned and unpaid at the time of discharge are due and payable immediately.” The penalties for willful violation of Section 201 are significant and include the obligation to pay “waiting time penalties” of up to 30 days’ pay to each affected employee. In addition, Labor Code section 227.3 requires an employer to pay all vested vacation pay at the time an employee is terminated. The Ninth Circuit concluded that while Section 227.3 creates an obligation to pay vested vacation time, Section 201 controls the timing for such payment. Thus, the case turned on when the Hyatt employees were discharged.

Section 201 does not define “discharge,” and no appellate court decision has interpreted the word, but the California Division of Labor Standards Enforcement (DLSE) has opined (both in a 1996 Opinion Letter and in its Policies and Interpretations Manual) that if an employee is laid off without a specific return date within the normal pay period, the employer must comply with Section 201 and issue a final paycheck (including all vested vacation pay).

The Ninth Circuit Court of Appeal adopted the DLSE’s rationale, finding it was consistent with the underlying purposes of the statute to protect employees in the case of a temporary layoff or furlough. It held that because Hyatt’s employees were laid off in March 2020 without a specific return date within the same pay period, they should have been given final paychecks, including any vested vacation. However, the Ninth Circuit remanded the case to the district court to determine whether the failure to issue final paychecks was “willful,” and thus, whether Hyatt must pay waiting time penalties.

What this Means for California Employers

Employers who furlough or temporarily lay off employees without a specific return-to-work date within the same pay period should issue “final” paychecks immediately upon discharge, including each employee’s vested and unused vacation or paid time off.

If you have questions about how this new case will affect your business or advice about how to implement these new requirements, please contact us.

• Katie M. McCray (kmccray@wilsonturnerkosmo.com)
• Michael Kalt (mkalt@wilsonturnerkosmo.com)
• Emily J. Fox (efox@wilsonturnerkosmo.com)
• Lois M. Kosch (lkosch@wilsonturnerkosmo.com)

Wilson Turner Kosmo’s Special Alerts are intended to update our valued clients on significant employment law developments as they occur. This should not be considered legal advice.