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In California, employees generally must be paid their final wages, which includes any accrued but unused paid time off or vacation, immediately upon the separation of their employment or within 72 hours of resignation. Employers who fail to timely pay final wages are subject to waiting time penalties, up to a maximum of 30 days of the employee’s pay.
Recently, in a case called Harnstein v. Hyatt Corp., the Ninth Circuit Court of Appeals answered the question of whether California employees on a temporary layoff (i.e., a “furlough”) need to be paid their final wages. The court concluded that there is no difference between a “furlough” and a layoff under the relevant Labor Code section and that final wages must be paid when an employee is laid off without a specific return to work date within a normal pay period.
Like many employers during the COVID pandemic, Hyatt furloughed employees in March 2020. Hyatt told the furloughed employees that the layoffs were temporary and that it hoped to bring them back once business returned to normal in eight to twelve weeks. Hyatt did not automatically payout accrued and unused vacation to the furloughed employees on the belief that their employment was not being separated. However, Hyatt did maintain employee benefits during this time.
One month later, Hyatt informed the furloughed employees that they were being permanently laid off and their employment separated, paying out all accrued and unused vacation at that time. The former employees later brought a lawsuit against Hyatt for failing to pay them final wages at the time of the furlough in March 2020.
The court noted that there was no prior case law on the issue of whether furloughed employees are owed final wages. As such the Ninth Circuit adopted the opinion of the California Division of Labor Standards Enforcement (DLSE). The court held that employment is separated for the purposes of employers’ final pay obligations when an employee is laid off without a specific return to work date within a normal pay period. Absent an unconditional right to return to employment on a specific date, there is a separation of employment under the applicable Labor Code section and wages are due and payable at that time. Thus, the former Hyatt employees were owed final wages when they were furloughed in March 2020 because they were not given a specific return to work date and the eight to twelve week estimate was insufficient.
The Ninth Circuit’s decision in Harnstein clarified for the first time that there is no distinction between an indefinite furlough and a layoff. Thus, where no specific return to work date is provided, employees on temporary layoff must immediately be paid their final wages (including accrued but unused vacation or PTO). Even providing the furloughed employees with the option of cashing out their accrued and unused vacation is insufficient, as the employer will be liable for waiting time penalties for those that choose not to cash out.
However, under the Labor Code provision that requires employers to pay final wages, employees must show that the failure to pay was “willful.” As a result, the Ninth Circuit remanded the case back to the district court to determine whether the failure to issue final paychecks in March 2020 was “willful,” thereby triggering waiting time penalties. In light of this new decision, employers implementing a temporary shutdown are advised to speak with legal counsel to determine their final pay obligations and avoid potentially costly penalties.
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