Waiting time penalties imposed under Section 203 of the California Labor Code are not “wages” for purposes of federal income or employment taxes, according to a Chief Counsel Advice Memorandum issued by the Internal Revenue Service. Although the Memorandum is not precedential, it provides guidance regarding the IRS’s current views on the taxability of such payments. The California Department of Industrial Relations (DIR) has long taken the position that waiting time penalties are not wages.

After analyzing federal and state law regarding the definition of “wages,” the Chief Counsel concluded that waiting time penalties were not wages under the Internal Revenue Code because they were not remuneration for an employee’s services. In reaching this conclusion, the Chief Counsel relied, in part, on the California Supreme Court’s decision in Pineda v. Bank of America, 241 P.3d 870 (2010) in which the Supreme Court ruled that an employee could not recover waiting time penalties as restitution because, unlike wages, the employee had no vested interest in those funds. The California Supreme Court stated: “Section 203 is not designed to compensate employees for work performed. Instead, it is intended to encourage employers to pay final wages on time, and to punish employers who fail to do so.” Because the obligation to pay waiting time penalties arises from the employer’s action or inaction, rather than an employee’s labor, waiting time penalties are more akin to liquidated damages and should not be considered wages subject to withholding and employment taxes.

However, the Chief Counsel also emphasized that its ruling did not apply to meal and rest period payments made under California Labor Code Section 226.7 because those payments are “essentially additional compensation for the employee performing additional services during the period when the meal and rest periods should have been provided.” Accordingly, the Counsel concluded that meal and rest period payments would constitute wages for federal employment tax purposes.

Employers should consider reviewing their payroll practices to ensure that any waiting time penalties or meal and rest period payments are subject to the applicable employment taxes and withholdings.

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Photo of Jonathan A. Siegel Jonathan A. Siegel

Jonathan A. Siegel is one of the founding Principals of the Orange County, California, office of Jackson Lewis P.C. He practices before the Equal Employment Opportunity Commission, National Labor Relations Board, state and federal agencies and courts.

Mr. Siegel also provides advice and…

Jonathan A. Siegel is one of the founding Principals of the Orange County, California, office of Jackson Lewis P.C. He practices before the Equal Employment Opportunity Commission, National Labor Relations Board, state and federal agencies and courts.

Mr. Siegel also provides advice and counsel regarding labor and employment law with respect to various issues ranging from wage and hour law, reduction in force, WARN Act, discipline, leave management and harassment and discrimination issues. Mr. Siegel defends employers regarding different varieties of wrongful termination and discrimination claims.

Mr. Siegel has represented management in union organizing drives and regularly defends employers in unfair labor practice proceedings as well as in collective bargaining and arbitrations. He also has extensive experience conducting wage and hour preventive audits. He conducts single location and multi-location audits for employers. The scope of such audits can range from examining specific issues, i.e., exempt status under federal law and California, to comprehensive FLSA and California Labor Code audits. Mr. Siegel has conducted audits for a wide range of industries including, but not limited to manufacturing, retail, transportation, various service industries, defense contractors and healthcare.

Mr. Siegel regularly speaks on a variety of topics including wage and hour, harassment/discrimination, national and California employment trends, Workers’ Compensation, EEO, managing leaves of absence under FMLA and state leave laws and union avoidance. He has moderated numerous programs and is featured as a keynote speaker for several different organizations.