In Ferra v. Loews Hollywood Hotel, LLC, the California Supreme Court last Thursday issued a disappointing decision for employers, finding 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. This means that when an employer pays meal and rest period premiums, it must take into consideration all compensation paid during the workweek, which includes all non-discretionary payments for the work performed and all rates paid to the employee during the week, to calculate a “regular rate of pay” (which is used for paying overtime) and use that rate to pay the premium when breaks are missed or late.
Regular Rate of Pay
Under the California Labor Code, if an employer fails to properly provide 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.” (Labor Code § 226.7(c).) California law also provides employees with overtime pay when employees work more than a certain number of hours for any given shift. When calculating overtime pay, employers are obligated to compensate an employee by a multiple of the employee’s “regular rate of pay.” (Labor Code § 510.) The “regular rate of pay” is not always the employee’s normal hourly rate. The regular rate of pay must include almost all forms of pay that the employee receives, including commissions, production bonuses, piece work earnings and must account for different rates paid during the workweek.
Plaintiff Ferra alleged that her employer, Loews Hollywood Hotel, improperly paid her meal and rest period premium payments by failing to include her nondiscretionary quarterly incentive bonuses in the calculation to come up with a regular rate for premium pay. Loews argued it was permissible under CA law to simply pay a base hourly rate and not obligated to include the additional bonus funds into the calculation. Loews had successfully defended itself before the trial court and Court of Appeal, relying on the difference in the text of the respective statutes.
The issue that the California Supreme Court was faced with was whether the Legislature intended “regular rate of compensation” to have the same meaning as “regular rate of pay.” After a lengthy analysis of legislative history and statutory interpretation, the Court disagreed with Loews and concluded that “regular rate of compensation” under Labor Code § 226.7(c) is synonymous with the “regular rate of pay” as defined under California Labor Code § 501(a). Accordingly, employers paying meal and rest period premiums must pay such premiums, not at an employee’s base hourly rate alone, but at a blended rate that includes all non-discretionary payments.
Perhaps the worst part for California employers is that the Ferra decision applies retroactively. Accordingly, employers who acted in good faith by complying with the previous Court of Appeal decision by paying premium pay at the base hourly rate are now subjected to class action and Private Attorney General Act (PAGA) claims based on this decision.
There may be more changes coming. Naranjo v. Spectrum Security is set to be decided by the California Supreme Court this year. In Naranjo, the Court will consider whether an unpaid meal and rest break premium can trigger penalties under the Labor Code. Previously, the Court of Appeal held that unpaid meal and rest period premium wages do not entitle employees to additional penalties.
What Should Employers Do Right Now?
For those companies who comply with legal requirements to pay the one hour of premium pay for missed or late breaks, meal periods, or recovery periods, review pay records to determine if the premium payments are being paid based on the regular rate of pay. If not, consult with counsel to implement steps to convert to a regular rate method of paying out premium pay to help reduce the risk of catastrophic class or PAGA actions.