Alert
07.23.21
In a significant departure from prior case law, on July 15, 2021, the California Supreme Court issued its unanimous decision in Ferra v. Loews Hollywood Hotel LLC et al., holding that the rate of payment owed to non-exempt employees as a premium for missed meal and rest breaks should not be the employee’s base hourly wage, but instead should be the same “regular rate” that is used to compensate those employees for overtime. Both the U.S. Department of Labor and the California Labor Commissioner have issued complicated regulations concerning what is properly included and excluded from the “regular rate.” In general, that rate is not simply the stated hourly wage, but includes a number of different kinds of remuneration, piecework earnings, non-discretionary bonuses, incentive payments, and commissions.
As to meal and rest break premiums, Section 226.7(c) of the California Labor Code requires an employer to “pay the employee one additional hour of pay at the employee’s regular rate of compensation” for each day that an employee is not afforded a compliant meal, rest or recovery period. In Ferra, the proposed class of plaintiffs alleged that by omitting nondiscretionary incentive payments from its calculation of premium pay, the employer had failed to pay for noncompliant meal or rest breaks at the employees’ “regular rate of compensation” as required by section 226.7(c).
Though both the trial court and the court of appeals agreed with the employer that calculating premium pay according to an employee’s base hourly rate is proper under section 226.7(c) of the Labor Code, the California Supreme Court issued a unanimous decision in favor of the plaintiffs and determined that, despite the difference in word choice, the “regular rate of compensation” to be used in calculations under section 226.7(c) is “synonymous” with the “regular rate of pay” employers must use to calculate overtime under section 510(a) of the Labor Code, which includes not only hourly wages but also all other nondiscretionary payments for work performed by the employee. After examining the history of the two provisions of the Labor Code, the Court ruled: “the words ‘compensation’ and ‘pay’ appear interchangeably in legislative and judicial usage, and we find no indication that the Legislature intended ‘regular rate of pay’ in Section 510(a) and ‘regular rate of compensation’ in Section 226.7(c) to have different meanings.”
The Court cited public policy considerations in its decision, stating that, “[t]his interpretation of section 226.7(c) comports with the remedial purpose of the Labor Code and wage orders and with our general guidance that the state’s labor laws are to be liberally construed in favor of worker protection.” In this same vein, the Court further held that considerations of fairness and public policy called for the retroactive application of its ruling.
On a practical level, this ruling might only affect a relatively small number of employers. Many California employers have already avoided providing bonuses and non-discretionary pay to non-exempt workers—so as to reduce the complexities in computation of the “regular rate” for purposes of overtime. Companies that do provide such bonuses should work with legal counsel to make sure their regular rate computation is correct, and that application of the regular rate is made in the appropriate circumstances, including meal and rest premiums.
In addition, open questions remain as to what damages can be recovered for claims arising from the failure to pay the appropriate rate of premium pay. There are powerful arguments that any damages are limited to the amount of underpayment of premium pay (and interest) and PAGA penalties for violation of Labor Code section 226.7. However, when the California Supreme Court hears Naranjo et al. v. Spectrum Security Services, Inc. this year, it will consider whether employees can recover waiting time or paystub penalties for meal and rest break violations. A pro-plaintiff decision on these derivative damages could make any failure to correct the rate of premium pay an expensive misstep for employers.
Of course, in light of the Ferra, ruling, potential penalties under PAGA could also be significant (and may allow for attorneys’ fees), which means that employers should take prompt action to ensure correct payment of break premiums, and should consider correcting past underpayments (with involvement of counsel). However, where an employee seeks PAGA penalties retroactively in light of this ruling, employers may have strong arguments that such penalties should either be low or not imposed at all, given that the law was previously unsettled, and the lower courts issued rulings supporting an employer’s interpretation of prior law as requiring premiums based on the hourly rate. Unfortunately, the weight of this argument may decrease with the passage of time if no remediation has occurred.
Nevertheless, complexities continue to exist regarding the computation of the “regular rate.” California employers should consult with legal counsel to ensure “regular rate” compliance on a going-forward basis.