California High Court Says Retiring Is Same as Quitting

Retired state employee can proceed with her claims for final pay waiting-time penalties

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The California Supreme Court has ruled that employees who retire must promptly receive their final paychecks just like an employee who resigns (McLean v. California, Cal., No. S221554, Aug. 18).

Under the California Labor Code, state and private-sector employees who quit their jobs must generally receive their final wages within 72 hours. However, if an employee provides notice at least 72 hours prior to the resignation date, then the employer must pay final wages on the last day of work.

Employers that fail to promptly pay final wages may be subject to daily waiting-time penalties in an amount equal to the employee's daily pay rate for up to 30 calendar days.

These waiting-time penalties can add up quickly for an employer, especially in a case with class-action claims, said Michelle Lee Flores, an attorney with Cozen O'Connor in Los Angeles.

Payroll Failure Alleged

Janis McLean retired in November 2010 from her position as a deputy attorney general for the California Department of Justice (DOJ). She filed individual and class-action claims asserting that the state systematically failed to properly pay final wages to employees who resigned or retired during a five-month period beginning in November 2010.

The state argued that McLean couldn't proceed with her claims because the prompt-payment rules don't apply to employees who retire.

The law protects employees who are discharged or who quit, and retiring isn't the same as quitting, the state argued. In support of its claim, the state pointed to language in another section of the labor code that separates the term "quits" from "retires."

Although a trial court agreed with the state, the California Supreme Court ultimately held that "the application of the prompt payment provisions do not turn on the nature of the employee's postemployment plans."

The court went into great detail about what it means to quit and said the fundamental definition is to end a person's employment, Flores noted. "The court said either you are terminated or you quit, and the reason doesn't really matter."

"Although an employer may often know in advance that an employee plans to retire from employment altogether, that will not always be the case," the court said. "Indeed, an employee's intentions at the time of quitting may be unclear even to the employee herself."

While the conclusion seems obvious, an alleged failure of the state payroll system could result in large penalties for the state, Flores said. "The state was probably grasping at straws to find some way that this person didn't qualify."

Permitted to Sue State

Aside from the retirement issue, the California Supreme Court also ruled that the plaintiff didn't lose her class-action wage and hour matter against the state, said Katherine Catlos, an attorney with Kaufman Dolowich & Voluck in San Francisco.

The defendants had argued that McLean improperly sued the state of California as a whole instead of the DOJ—the department that employed her.

However, McLean asserted that "a common payroll system governed by the state controller is responsible for disbursing any and all wages owed" to a worker who resigns from state employment.

Although she had worked for the DOJ, she alleged wrongdoing by the state controller, which paid her wages along with the department, Catlos explained.

"This is an interesting twist because the court focused on who essentially managed payroll—the state controller," she noted.

At this stage in the litigation, however, the state high court said it would not address "questions concerning the proposed class, class certification and the proper scope of discovery."

Lessons for Employers

Even though McLean was a state employee, private-sector employees are also covered under the relevant sections of the labor code, Flores said.

Reviewing pay practices periodically is a good idea, and this ruling provides a great reason for employers to go ahead and review them now, she added. "Although we all knew in our minds that to retire is to quit anyway, let's take this opportunity to make sure we are doing everything properly."

She suggested that, if someone quits or is discharged and an employer can't timely pay final wages, it may be a good practice to voluntarily pay the waiting-time penalties.

If the final wages are provided a day or two late, for example, she said it might make sense to just give those two days of waiting-time penalties to the employee in a separate check.

"Make it clear in writing that you're not extending the employment date but voluntarily providing the penalty payment," she explained. "Don't be stingy on a day or two if you're not able to get it done in time because it can turn into a much bigger issue down the road." 

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