In a recent decision, the California Supreme Court provided no breaks for employers when it unanimously overturned a Court of Appeal decision that instructed employers to pay meal and rest period premium pay at the employee’s base hourly rate.  According to the California Supreme Court, the common practice of paying missed meal and rest break premiums at an employee’s base hourly rate violates California employment law.  In Ferra v. Loews Hollywood Hotel, LLC (2021) WL 2965438, the California Supreme Court held that meal and rest break premium pay must be based on the employee’s “regular rate of pay” as opposed to their base hourly rate.  The “regular rate of pay” includes all hourly wages and other nondiscretionary earnings (such as shift differentials, nondiscretionary bonuses, commissions, or other nondiscretionary incentive pay).  Importantly, the Court also held that its ruling applies retroactively.

Background

Under California Labor Code section 226.7(c), if an employer fails to provide an employee with a meal, rest, or recovery period, the employer must pay the employee one additional hour of pay at the employee’s “regular rate of compensation.”  The phrases “regular rate of compensation” and “regular rate of pay” were held to have different meanings by the California Court of Appeals.  The widely held interpretation was that the phrase “regular rate of compensation” used for meal and rest break premiums is just the employee’s base hourly rate, while the “regular rate of pay” is the rate utilized in the overtime context, which includes all nondiscretionary payments. The now-outdated interpretation made the calculation for meal or rest break premiums straightforward – simply one hour of pay at the employee’s base hourly rate.

The California Supreme Court ruled that the two terms were a distinction without a difference and that the “regular rate of compensation” paid for meal and rest break premiums must be calculated in the same manner as the “regular rate of pay” used in calculating overtime pay.

California Supreme Court Decision

The defendant in this case, Loews Hollywood Hotel, LLC (“Loews”), employed plaintiff Jessica Ferra (“Ferra”) as a bartender.  Loews paid Ferra hourly wages and quarterly nondiscretionary incentive payments as compensation.  When an hourly employee was not provided with a compliant meal or rest period, Loews paid the employee an additional hour of pay according to the employee’s hourly wage.  Any nondiscretionary payments were not factored into the calculation of premium pay owed under Labor Code section 226.7(c).

Ferra filed a class action suit against Loews alleging that Loews, by omitting nondiscretionary incentive payments from its calculation of premium pay, failed to properly pay her for noncompliant meal or rest breaks in accordance with her “regular rate of compensation.”  The trial court granted summary adjudication for Loews on the ground that calculating premium pay using the employee’s base hourly rate was proper.  The Court of Appeal affirmed, holding that “regular rate of compensation” and “regular rate of pay” are not synonymous, and that the premium owed to an employee for a missed meal or rest periods is one hour of the employee’s base hourly wage.

After an exhaustive analysis of legislative history and statutory interpretation, the California Supreme Court concluded that “regular rate of compensation” is synonymous with “regular rate of pay.”  As a result, employers must pay meal and rest period premiums at a blended rate that includes both the employee’s base hourly rate of pay and all nondiscretionary payments, rather than just using the employee’s base hourly rate.

Moreover, the California Supreme Court held that this decision applies retroactively. The Court was not persuaded by Loews’s argument that retroactive application will have a negative substantive effect because it will expose employer to “millions” in liability.  Rather, the Court reasoned that “it is not clear why we should favor the interest of employers in avoiding millions in liability over the interest of employees in obtaining the millions owed to them under the law.”

Calculating Meal/Rest Premiums

To illustrate this new ruling, consider the following example:

Employee Emily makes $25/hour. She worked 40 hours in the week over a 5 day period, and also received a $10 bonus for each day of work.

To calculate her regular rate of pay for this pay period, start by multiplying Emily’s hourly rate by total hours worked: $25 x 40 hours = $1,000.

Next, add the total amount of nondiscretionary bonus provided during the pay period: $1,000 + $50 (i.e., $10 bonus x 5 days) = $1,050.

Lastly, the sum is then divided by the total number of hours worked: $1,050/40 hours = $26.25.

Therefore, Emily’s regular rate of pay is $26.25 for this pay period for any meal and rest break premiums.  While the difference between $26.25 and $25.00 may not seem substantial, failing to properly pay the correct amount of a meal or rest break premium can result in a slew of other labor law violations which will add up very quickly over a short period of time.

Conclusion

This ruling does not affect employers who do not pay employees any additional pay beyond their hourly pay.  Employers who pay additional amounts such as bonuses, incentives, commissions, and the like, must ensure they pay meal and rest period premiums using the appropriate rates (just as they should be doing with respect to overtime pay rates).  Employers are encouraged to carefully examine their payroll practices to ensure all premium payments paid to employees are consistent with this new ruling (both on a going-forward and looking-back basis).  Please do not hesitate to contact NavBat with any questions relating to calculating meal and rest break premiums and related issues.