California’s Final Pay Rules Apply to Retiring Employees

Answering a question not tackled in previous cases, the California Supreme Court has held that the state’s timing requirements for payment of final wages apply to employees who retire, on the same basis as employees who quit.
 
California has strict timing rules for payment of final wages when employment ends. While some states allow payment of final wages on the next regular payday, California does not. California Labor Code section 201 requires immediate payment of “wages earned and unpaid at the time of discharge” when an employer terminates employment. When an employee quits, California Labor Code section 202 provides that an employee’s final wages “shall become due and payable not later than 72 hours thereafter, unless the employee has given 72 hours previous notice of his or her intention to quit, in which case the employee is entitled to his or her wages at the time of quitting,” or on the last day of work. Although the statute allows up to 72 hours to pay final wages when an employee quits without notice, the reality is that final wages often are due much sooner. In most cases, an employee gives more than 72 hours’ advance notice of resignation, making final wages due on the employee’s last day worked.
 
The timing of final wage payments is an important liability issue for California employers. Under California Labor Code section 203, an employer “who willfully fails to pay” timely “any wages of an employee who is discharged or who quits,” faces waiting time penalties of one day’s wage for each day that wages remain unpaid, up to 30 days. These penalties apply regardless of the amount of wages paid late, resulting in significantly disproportionate waiting time awards in some cases.
 
The Labor Code expressly addresses the timing of final wage payments when an employee “is discharged” or “quits.” What if an employee retires? The court’s unanimous decision in McLean v. State of California held that employees who retire must be paid final wages the same as an employee who quits. The court rejected the employer’s argument that an employee who retires does not “quit,” and thus would not be subject to the final pay timing requirements and ineligible for waiting time penalties. Applying the ordinary meaning of the word “quits” as to stop doing something or to leave one’s employment, the court held that the term “easily encompasses withdrawal from employment for the purpose of retiring.” In other words, an employee necessarily must quit to retire, so a retirement is a quit under the law.
 
The court further explained that the “ordinary meaning” of the term “quit” is broad, encompassing “a voluntary departure from a particular employment, whatever its motivation: an employee who retires, no less than an employee who ends one job to start another, has ‘stopped,’ ‘ceased,” or ‘left’ her employment.” The reason for quitting makes no difference concerning when final wages must be paid. The court held that the prompt payment provisions “do not turn on the nature of the employee’s post-employment plans.” When an employee retires, an employer may not always know if the employee intends to retire from employment altogether, and the intentions “may be unclear even to the employee herself.” The court concluded: “It is unlikely that the Legislature would have intended the obligation to make prompt payment of final wages turn on matters that may be unknown, or perhaps unknowable, to the employer at the time the payment is due.” Thus, for final wage payment purposes, a quit is a quit – and it does not matter if the employee will retire.
 
Although this case involved the State of California, private employers should pay attention to this ruling. The same timely payment rules generally apply to the state and private employers here, as the Legislature extended these provisions to state employees in 2000. On a retiring employee’s election, however, the law allows the state to pay out certain unused paid leave later and be considered timely – an option private employers do not enjoy. (The state allegedly did not make final payments timely to retiring employees, leading to a putative class action for waiting time penalties.) Otherwise, private employers and California state agencies face the same final pay timing rules.
 
This case presents a good opportunity for employers to review their final wage payment practices for compliance with California law. Under this case, employers should make sure that employees who quit to retire receive their full final wages due within the timing requirements, just like any other employee who resigns. As the court noted, “wages” include not only items such as hourly pay or salary earned through the final date of work, but also accrued and unused vacation or paid time off (PTO). Private employers must timely pay these amounts with final wages as well. (California’s paid sick leave law does not require employers to pay out unused sick leave.)
 
When discharging an employee, an employer must ensure that the employee receives full final wages on the last day of employment. The only exceptions to the requirement of immediate payment of final wages are a handful of narrow exemptions for particular industries – for example, seasonal employment in canning fruits or vegetables, when an employee’s assignment for a temporary services employer ends, layoff in the oil drilling industry, motion picture production employees, and union employees working short-term jobs at venues hosting live theatrical or concert events. As discussed, employees who resign with advance notice generally will have their final wages due on the last day, unless an employee gave less than 72 hours’ notice. Obviously, when an employee quits without any advance notice, the employer gets the benefit of the full 72 hours to pay final wages. The final wages due are anything earned through the last day of employment, including accrued and unused vacation or PTO.
 
An employee generally must actually receive the wages by or on the date due for a final wage payment to be timely. Contrary to some misperceptions, an employer may use direct deposit to pay final wages. If the employee has an existing (and voluntary) direct deposit authorization, California Labor Code section 213(d) allows the employer to use direct deposit. Importantly, however, the employer still must comply with the timing requirements – meaning that the funds still must be available to the employee, through the employee’s account, by the date due. Such timing is not always possible through direct deposit, requiring employers to take other steps.
 
Employers also should be cautious about mailing an employee’s final wages. Any delay in receipt by mail, beyond the due date, can lead to waiting time penalties. In fact, the final wage payment provisions authorize payment by mail in only narrow situations. The main one is when an employee quits without providing a 72-hour advance notice. That employee may receive payment by mail, but only if the employee requests and designates a mailing address. In that situation, California Labor Code section 202(a) provides that the “date of the mailing shall constitute the date of payment for purposes of the requirement to provide payment within 72 hours of the notice of quitting.” In addition, the Labor Code allows employers in the motion picture production and oil drilling industries, as well as employers laying off seasonal employees in the curing, canning, or drying of any variety of perishable fruit, fish or vegetables, to mail final wage payments in at least some instances.
 
Given the potential risks that employers face in complying with California’s final wage payment requirements, and the potential exposure to waiting time or other penalties for not making timely or proper payments, employers may wish to consult their employment law counsel to review these matters.