Often when employees resign or are terminated, they have unused vacation time that must be paid out by their employer at the time of the separation.  Are employers required to pay departing employees unused vacation hours calculated at their base rate or at a higher final wage rate that includes shift differentials? That was the central question in Cinnamon Mills v. Target Corp. Case. No. 21-56308, 9th Circ. Ct. of Appeals (August 28, 2020)[i], which the Ninth Circuit Court of Appeals recently resolved by refusing to reverse the district court’s ruling which granted each party summary judgment on different issues.[ii]

Cinnamon Mills (“plaintiff”) sued Target Corporation (“defendant”) on June 10, 2020. The plaintiff asserted three causes of action including (1) failure to pay vested vacation under California Labor Code § 227.3[iii]; (2) failure to timely pay final wages under California Labor Code §§ 201 and 203[iv]; and (3) unfair and unlawful competition under California Business and Professions Code § 17200[v]. In response, the defendant removed the case to the United States District Court for the Central District of California and filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6)[vi]. The district court granted summary judgment for the defendant on the plaintiff’s § 203[vii] claim but also granted summary judgment in favor of the plaintiff on her § 227.3[viii] claim. The plaintiff and defendant both cross appealed.

The Arguments

California Labor Code § 227.3[ix] provides:

“Unless otherwise provided by a collective-bargaining agreement, whenever a contract of employment or employer policy provides for paid vacations, and an employee is terminated without having taken off his vested vacation time, all vested vacation shall be paid to him as wages at his final rate in accordance with such contract of employment or employer policy respecting eligibility or time served; provided, however, that an employment contract or employer policy shall not provide for forfeiture of vested vacation time upon termination. The Labor Commissioner or a designated representative, in the resolution of any dispute with regard to vested vacation time, shall apply the principles of equity and fairness.”

California Labor Code § 203(a)[x] states:

“If an employer willfully fails to pay, without abatement or reduction, in accordance with Sections 201, 201.3, 201.5, 201.6, 201.8,201.9, 202, and 205.5, any wages of an employee who is discharged or who quits, the wages of the employee shall continue as a penalty from the due date thereof at the same rate until paid or until an action therefor is commenced; but the wages shall not continue for more than 30 days. An employee who secretes or absents themselves to avoid payment to them, or who refuses to receive the payment when fully tendered to them, including any penalty then accrued under this section, is not entitled to any benefit under this section for the time during which the employee so avoids payment.”

Regarding the § 227.3 claim[xi], the defendant argued that the plaintiff’s “final rate” was her “vacation rate.” This “vacation rate” equaled $13.00 an hour at the time of her termination from the company.[xii] The defendant then argued that the vacation payout should be calculated using the $13.00 an hour rate. The plaintiff contended just the opposite, stating that her “final rate” included not only her “vacation rate” but also her $2.00 per hour shift differential.[xiii] The plaintiff asserted her vacation payout should have been calculated using the higher $15.00 an hour rate, which would have increased the amount of her vacation payout upon her termination.

In affirming the district court’s order, the court found that “final rate” meant final “wage rate” and included shift differentials.[xiv] The court stated, “…the term “at his final rate” follows “wages.” Under the nearest-reasonable-referent canon, “final rate” modifies “wages.”[xv]  Therefore, it would be natural to read the phrase “paid to him as wages at his final rate” as requiring employers to pay terminated employees vested vacation “as wages at his final [wage] rate.”[xvi] Based upon this interpretation of California Labor Code § 227.3, the court found that the plaintiff’s proposed rate of pay was the “final rate,” disagreeing with the defendant and affirming the district court’s order granting plaintiff summary judgment on this portion of her claim.

As it pertained to the § 203 claim[xvii], the court found that the defendant did not willfully or intentionally withhold payment of the proper amount of the plaintiff’s vacation payout.[xviii] In essence, the plaintiff could not point to any evidence that defendant’s withholding of wages was based on anything other than its misunderstanding of California Labor Code § 227.3[xix]. As such, the court agreed with the district court’s conclusion that the defendant acted in good faith, and affirmed the order granting defendant summary judgment on that issue.

Takeaway

A company can face an abundance of potential liability when deciding to terminate an employee. This case demonstrates yet another example of the treacherous waters employers must navigate when an employee’s employment is terminated. Employers must ensure they include any supplemental pay that increases an employee’s base rate when calculating a vacation payout after the termination of an employee. If they do not, the employer could be held liable.  That said, Mills seems to place a high bar on obtaining waiting time penalties under California Labor Code § 203[xx]. Mills suggests that a plaintiff must show evidence of willful or intentional conduct resulting in the withholding of an employee’s pay. The employer’s mere ignorance of the law or an employer’s usage of an incorrect rate in arriving at the employee’s vacation payout does not appear to be sufficient for a court to hold that the employee is entitled to waiting time penalties.

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Sources

[i] Cinnamon Mills v. Target Corp. Case. No. 21-56308, 9th Circ. Ct. of Appeals (August 28, 2020)

[ii] Memorandum Disposition from the 9^th Circ. Ct. of Appeals (March 6, 2023)

[iii] California Labor Code section 227.3

[iv] California Labor Code sections 201 and 203

[v] California Business and Professions Code section 17200

[vi] Federal Rule of Civil Procedure section 12(b)(6)

[vii] California Labor Code section 203

[viii] California Labor Code section 227.3

[ix] California Labor Code section 227.3

[x] California Labor Code section 203

[xi] California Labor Code section 227.3

[xii] Defendant’s Motion To Dismiss, Cinnamon Mills v. Target Corp. Case. No. 21-56308, 9th Circ. Ct. of Appeals (August 28, 2020)

[xiii] Plaintiff’s Opposition To Defendant’s Motion To Dismiss, Cinnamon Mills v. Target Corp. Case. No. 21-56308, 9th Circ. Ct. of Appeals (August 28, 2020)

[xiv] Memorandum Disposition from the 9^th Circ. Ct. of Appeals (March 6, 2023)

[xv] Id., citing Hall v. U.S. Dep’t of Agric., 984 F.3d 825, 837–38 (9th Cir. 2020)

[xvi] Id.

[xvii] California Labor Code section 203

[xviii] 9th Circ. Ct. of Appeals Ruling On Defendant’s Motion To Dismiss, Cinnamon Mills v. Target Corp. Case. No. 21-56308, 9th Circ. Ct. of Appeals (August 28, 2020)

[xix] California Labor Code section 227.3

[xx] California Labor Code section 203