by Mark Schickman

We all know that wages are due upon termination of employment. But during the COVID mandatory leaves and shutdowns, when did employment end, and when were final checks due? In one of an ongoing series of decisions following the COVID business disruptions, the U.S. 9th Circuit Court of Appeals (which covers employers in Alaska, Arizona, California, Guam, Hawaii, Idaho, Montana, Nevada, Northern Mariana Islands, Oregon, and Washington) answers that question and more.

COVID Furlough

In March 2020, because of the reduction in business caused by the COVID-19 pandemic, Hyatt decided to furlough or temporarily lay off over 7,000 employees, expressing in a letter the hope that the hotel’s business would return to normal in eight to 12 weeks, depending on “the circumstances at that time.” The letter stated that health benefits would continue through April and May and that accrued vacation pay could be paid upon the employee’s request, although Hyatt was “not separating anyone’s employment at this time.”

In June 2020, Hyatt sent another letter, informing employees that “your furlough will become a layoff effective June 27, 2020, and your employment with Hyatt will be terminated as of that date.” The letter stated that, “as part of the transition to layoff status, you will be paid all unused accrued and earned vacation as well as unused floating holidays.” Although it hoped the layoffs would be temporary, it wrote that “because we are unable to provide you with a return to work date at this time, your layoff is ‘indefinite’ and is considered a termination.”

Karen Hartstein and members of a certified class are former California employees of Hyatt Corporation who were part of the layoff. They contend Hyatt violated California law by failing to pay them immediately for their accrued vacation time and by failing to compensate them upon termination for the value of free hotel rooms employees received each year. They also sought waiting time penalties, penalties for failure to furnish accurate wage statements, unfair business practices, and enforcement under the Private Attorneys General Act (PAGA).

Hyatt asked the trial court to dismiss the case, and the court granted the request, concluding that the March 2020 furlough wasn’t a termination within the meaning of Labor Code § 227.3 because there wasn’t a complete severance of the employer-employee relationship. The court also rejected the claim that the value of the complimentary hotel rooms class members were eligible to receive constituted wages they should have received upon discharge. Finally, the court dismissed the claims under California’s unfair competition law and PAGA as derivative of the claims under the California Labor Code. The employees appealed.

DLSE Letter is not Binding, but Persuasive

Hyatt didn’t challenge the well-established legal policy that an employee must be paid all wages upon termination, but rather, based its argument upon when a discharge occurs under the labor code’s prompt payment provision. The 9th Circuit acknowledged there’s no judicial precedent defining when a layoff becomes a discharge, but the California Division of Labor Standards Enforcement (DLSE)—the state agency empowered to enforce California’s labor laws— had answered the question explicitly. While the DLSE’s opinion letters aren’t controlling upon the courts, they do constitute a body of experience and informed judgment and guidance. Courts may adopt the DLSE’s interpretation if persuaded that it is correct. The court of appeal did so here.

A DLSE opinion letter and its policies and interpretations manual establish that a temporary layoff without a specific return date within the normal pay period is a discharge that triggers the prompt payment provisions of Cal. LaborCode§201. Hyatt thus should have paid the accrued vacation pay at the initial lay off in March 2020 because the temporary layoff was longer than the normal pay period and there was no specific return date.

The court also found this interpretation best enforces the public policy behind the prompt payment law, since many workers live from paycheck to paycheck, and depriving them of the paycheck would deprive them of the necessities of life and make them “a charge upon the public.”

The 9th Circuit also sent back to the trial court the issue of whether the delayed payment was a willful violation of law that could yield a waiting-time penalty of up to 30 workdays—about 1.3 months of pay per employee. It did throw the company a life preserver on that issue, noting that “Hyatt’s actions are understandable given the uncertainty during the early period of the pandemic.” A finding of willfulness can be avoided if the employer can show its “reasonable, good-faith belief that wages are not owed” or whether “there was an objectively reasonable, even if unsuccessful, defense to the payment of wages.” The court of appeal appeared to give that to Hyatt.

Pay for Sleeping on the Job?

As part of the benefits given to its employees, Hyatt provides a certain number of free hotel nights per year. The employees claimed that was a nondiscretionary bonus that should have been included in the calculation of their regular rate of pay in determining their final wage and overtime payments. Hyatt argued the hotel rooms are gifts because they are provided for free or at a discount to their employees without a contractual obligation to do so and thus aren’t included in the regular pay rate. The trial court excluded the value of the hotel rooms from the calculation of wages, finding they were gifts.

The 9th Circuit agreed to exclude them—not as gifts, but under the “other similar payments” exclusion, which “do not depend on hours worked, services rendered, job performance, or other criteria that depend on the quality or quantity of the employee’s work.” The free hotel rooms aren’t dependent on any of those factors, so the 9th Circuit affirmed the trial court’s determination that the value of the complimentary hotel rooms was properly excluded from the calculation of employees’ regular pay rate. Hartstein v. Hyatt Corp. (9th Cir., 22-55276 9/22/23).

Bottom Line

Employers had to make decisions in real time during the pandemic and are just finding out now whether some of their actions were correct. Hyatt might end up in good shape even though it wasn’t timely in paying final wages. The trial court held it acted legally, and the 9th Circuit recognized it had a reasonable argument. It may escape the waiting time penalties that could be the largest elements of liability in the adverse ruling. But this decision makes it crystal clear that a furlough extending beyond the current pay period triggers the statutory obligation to pay final wages. When in doubt, pay final wages.

Secondly, it benefits both employers and employees that Hyatt wasn’t penalized by granting its employees complimentary hotel rooms and wasn’t require to have their value included within the base wage calculation. If the ruling were otherwise, employers would be motivated to be less generous in the provision of such gratuities to their employees.

Mark I. Schickman is Editor of the California Employment Law Letter and the founder of Schickman Law in Berkeley, California. Mark has successfully litigated almost every type of employment case in the courts before juries and administrative agencies and on appeal and is a popular and engaging trainer providing employment advice to employers across the country. He can be reached at Mark@SchickmanLaw.com.