Opinion ID: 835389
Heading Depth: 2
Heading Rank: 2

Heading: Plaintiffs' claim for penalty wages

Text: We begin with the issue that arises under the Oregon wage and hour scheme, i.e., whether Acstar, as Vander Kley's surety, is liable on the construction bond for what are termed penalty wages under ORS 652.150(1). As described, ORS 652.140(1) requires an employer to pay all wages earned and unpaid to a discharged employee within one business day after the employee's last day of work. If the employer fails to pay those final wages on that date, and if the failure is willful, a penalty arises under ORS 652.150(1): [I]f an employer willfully fails to pay any wages or compensation of any employee whose employment ceases, as provided in ORS 652.140   , then, as a penalty for the nonpayment, the wages or compensation of the employee shall continue from the due date thereof at the same hourly rate for eight hours per day until paid or until action therefor is commenced.    The penalty for late payment accrues for a maximum of 30 days from the due date. ORS 652.150(1)(a). An employer may avoid liability for penalty wages by showing financial inability to pay the wages or compensation at the time the wages or compensation accrued. ORS 652.150(5). If the employer fails to pay the final earned wages or any penalty wages that accrued for their late payment, the employee has a statutory wage claim against the employer for those amounts. See ORS 652.320(7) (wage claim is a claim against the employer for any wages, compensation, damages or civil penalties provided by law to employees in connection with a claim for unpaid wages). [10] In this case, plaintiffs' employer, Vander Kley, fell into financial distress and, for months, had not been paying plaintiffs on time. Eventually, he was unable to pay them at all. At that point, Vander Kley discharged plaintiffs and Acstar, as Vander Kley's surety, stepped in to pay plaintiffs their final wages. By then, the wages already were overdue under ORS 652.140(1). Acstar paid plaintiffs their final wages once it determined the amount owed to each one, which delayed the payments past the due date by about a month. Acstar did not, however, pay plaintiffs penalty wages based on the untimeliness of their final paychecks. Plaintiffs have two arguments for why they are entitled to recover penalty wages from Acstar. First, they argue that Acstar is liable under ORS 279.526(1), which provides the mechanism for recovery against a contractor's surety bond on a public works project: A person claiming to have supplied labor or materials for the prosecution of the work provided for in the contract, including any person having direct contractual relationship with the contractor furnishing the bond or direct contractual relationship with any subcontractor    has a right of action on the contractor's bond [or other security] as provided for in ORS 279.029 only if: (a) The person or the assignee of the person has not been paid in full; and (b) The person gives written notice of claim, as prescribed in ORS 279.528, to the contractor and the state agency, if the contract is with a state agency, or the clerk or auditor of the public body that let the contract if the public body is other than a state agency. Relying on paragraph (a) of subsection (1), plaintiffs argue that they have not been paid in full because the compensation legally owed to them includes penalty wages under ORS 652.150. In effect, plaintiffs urge that being paid in full implicitly encompasses statutory penalties in connection with unpaid earned wages, as well as unpaid wages themselves. In resolving that issue, our decision in Butler v. United Pacific Ins.Co., 265 Or. 473, 509 P.2d 1184 (1973), is instructive. Butler involved whether a surety on a statutorily required automobile dealer's bond was liable for punitive damages assessed against the dealer in a civil action. This court began its analysis with the common-law principle that a surety ordinarily is not liable for penalties imposed by law on a person covered by the bond. Id. at 474-75, 509 P.2d 1184 (citing with approval Restatement (First) of Security § 181 (1941)). [11] The rationale for that limitation is that the purpose of a penalty i.e., to deter disfavored conductis ill-served when the person who engaged in the conduct does not have to pay the penalty. Id. at 477, 509 P.2d 1184. Punitive damages, the court observed, fall within that rationale because they are imposed as a penalty to deter tortious conduct, rather than as compensation. Id. As the court acknowledged, the legislature can change a surety's liability to encompass penalties such as punitive damages. Id. at 475, 509 P.2d 1184. But the court was unwilling to impose liability on a surety for penalty amounts unless the legislature had, in clear and unambiguous terms, so provided by statute. Id. at 475-78, 509 P.2d 1184. The statute at issue in Butler permitted a plaintiff to recover from the bond any loss or damage suffered due to an automobile dealer's fraud; it did not expressly or in other clear terms authorize recovery of punitive damages. Id. The court therefore held that the surety was not liable for those amounts. Id. at 478, 509 P.2d 1184. [12] As was true of the punitive damages in Butler, penalty wages under ORS 652.150(1) are the kind of penalty for which a surety ordinarily is not liable. They accrue for an employer's willful failure to pay a terminated employee earned wages on time. ORS 652.150(1). Penalty wages are designed to spur an employer to the payment of wages when they are due and are punitive, not compensatory, in nature. Nordling v. Johnston, 205 Or. 315, 326, 283 P.2d 994 (1955). [13] Id. Under Butler, then, Acstar is liable on its bond for penalty wages only if the legislature unambiguously has provided for sureties on public works projects to be liable for penalties arising from the contractors' breach of their payment obligations. ORS 279.526(1) does not so provide. The statute declares that a person claiming to have supplied labor    for the prosecution of the work provided for in the contract has a right of action on the contractor's bond [or other security] as provided for in ORS 279.029[.] In the paragraphs that immediately follow, the statute imposes two conditions on bringing an action on the bond: (1) the plaintiff must not have been paid in full and (2) the plaintiff must have given written notice of claim. ORS 279.526(1)(a), (b). In context, paid in full and notice of claim refer to the claim for labor supplied on a public works project i.e., a claim for earned wages. [14] The statute does not expand the surety's liability to include penalties arising from the principal's breach of its payment obligations, and it certainly does not do so in the express and unambiguous terms that Butler requires. We therefore hold that penalty wages under ORS 652.150(1) are not recoverable in an action on a public works construction bond under ORS 279.526(1). Plaintiffs' second theory for holding Acstar liable for penalty wages is that Acstar is directly liable for penalty wages under ORS 652.150(1) as Vander Kley's agent, apart from its liability as a surety. As both the trial court and the Court of Appeals reasoned, however, our analysis in Taylor v. Werner Enterprises, Inc., 329 Or. 461, 988 P.2d 384 (1999), forecloses that argument. In Taylor, this court held that ORS 652.150(1) imposes liability for penalty wages on a worker's employer and that, for purposes of that statute, the definition of employer in ORS 652.310(1) applies. 329 Or. at 467, 988 P.2d 384. Under that definition, employer means any person who in this state, directly or through an agent, engages personal services of one or more employees [.] ORS 652.310(1). Thus, liability for penalty wages extends only to a person who engages an employee's personal services. Even assuming that Acstar was in some sense Vander Kley's agent for purposes of paying his former employees (a question that we do not decide), Acstar did not engage plaintiffs' personal services. Acstar therefore was not their employer for purposes of ORS 652.150(1) and has no direct liability for penalty wages under the statute.