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Employee Retirement Triggers Final Pay Obligations

California Labor Code section 202 requires that employers pay employees their final wages, including accrued and unused vacation or paid time off (PTO), in a timely fashion: immediately in the case of an involuntary termination, and within 72 hours of an employee voluntarily “quitting” without notice.

A ruling in a recent case has indicated that for purposes of section 202, a “retirement” constitutes a quit. McLean v. State of California, 228 Cal.App.4th 1500 (2014)

Final Pay Requirements

Janis McLean worked for the state of California as a deputy attorney general. She retired on November 16, 2010. She alleged that she did not receive her final paycheck for wages and accrued, unused vacation within 72 hours of her retirement date, in violation of Labor Code section 202.

Labor Code section 202 contains three requirements relevant to McLean’s case:

  • An employer must pay final wages within 72 hours of the date the employee quit , or pay immediately at the time of resignation if the employee gives 72 or more hours’ notice (this requirement applies to private and state employers;
  • A state employer must, upon request by an employee, transfer unpaid wages into a state sponsored supplemental retirement plan. This transfer must be made within 45 days of the last day of employment; and
  • A state employer must transfer any wages that the employee elects to defer to the following calendar year by February 1 of that next year.

McLean alleged that the state of California did not comply with any of these requirements. She requested relief pursuant to Labor Code section 203, which grants employees waiting time penalties: If an employer fails to pay final wages pursuant to section 202, the employee continues to earn one day of wages for every day the payment is late, up to 30 days.

Retiring or Quitting?

The state of California argued that it was not required to comply with the requirements of section 202 because that section only applies to employees who “quit.” Specifically, the section reads: “If an employee not having a written contract for a definite period quits his or her employment, his or her wages shall become due and payable not later than 72 hours thereafter …”

The remainder of the code section frequently uses the word “quit” in describing the separation of employment.

The state of California argued that McLean did not “quit,” she “retired” and, therefore, section 202 did not apply. The trial court agreed with the state and McLean filed an appeal.

The appellate court consulted a variety of legal and non-legal dictionaries, and noted that all of the definitions of “quit” seemed to encompass the definitions that describe retirement, noting “all the definitions speak to leaving a job.”

The state of California argued that the general definitions were not applicable in McLean’s case because in civil service, there are three very distinct categories for employees who leave employment: resignation, termination and retirement. It would therefore be consistent for the state to treat employees differently under each of these three categories.

Additionally, the state pointed out that the language of section 202 specifically refers to “quitting” and “retiring” separately in one of its subsections: “when a state employee quits, retires, or disability retires from employment ….” As a result, the state argued, the Legislature intended that “quitting” and “retirement” should be treated differently.

The court disagreed, noting that although McLean’s case involved state employment, section 202 applies to employers in the private sector as well. It would be inappropriate to interpret that code section using definitions that are utilized solely or primarily in civil service.

Instead, the court held that a retirement is considered a “quit” for purposes of section 202, and triggers the timely payment of final wages requirements.

Lessons for Employers

Although McLean involved a state employee, the court stated that its ruling applies to private sector workers as well. Employers should review their final pay policies to comply with this decision:

  • Ensure that all wages, including accrued, unused vacation, are paid:
    • Immediately upon involuntary termination;
    • Within 72 hours of a voluntary resignation without notice; or
    • On the employee’s last day of employment for a voluntary resignation with 72 or more hours’ notice.
  • For final pay purposes, treat employees who are retiring the same as employees who voluntarily resign.

Consult legal counsel if you believe you have not paid an employee final wages in a timely fashion.

Posted in: Employment Law, News

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