Last week the California Supreme Court in Ferra v. Loews Hollywood Hotel, LLC dealt yet another blow to California employers: whenever an employee misses a meal or rest period, or takes a non-compliant meal or rest period (i.e., one that is late or short), the employee must be paid an extra hour of pay at his or her “regular rate of pay,” not just his or her base hourly rate of pay. And to make matters worse, the decision applies retroactively.
General Rules: Meal, Rest and Recovery Period Premiums
California generally requires employers to provide employees with an unpaid 30-minute, duty-free meal period that begins no later than the end of the fifth hour of work and a second unpaid 30-minute, duty-free meal period beginning no later than the end of the tenth hour of work. Employers must also provide a 10-minute paid rest break for every four hours worked, or major faction thereof, which generally means about every two hours, and recovery breaks, i.e., cool down periods of at least five minutes, on an “as needed” basis to employees who work outside.
Under California Labor Code section 226.7 subdivision (c), if an employer does not provide an employee with a compliant meal, rest or recovery period, it is must pay the employee one additional hour of pay at the employee’s “regular rate of compensation” for each workday that a compliant meal, rest or recovery period is not provided. From a practical point of view, employers typically pay this additional hour of pay at the employee’s base hourly (straight-time) rate of pay.
Regular Rate of Pay for Overtime
Under California Labor Code section 510, employers must provide overtime premium pay at the employee’s “regular rate of pay” when employees work more than a certain amount of time. “Regular rate of pay” has been interpreted to mean an employee’s base rate of compensation plus any adjustments to that rate arising from additional compensation the employee receives, which includes such items as shift differentials, bonuses, and commissions. In other words, the regular rate of pay is not just the employee’s base hourly (straight-time) rate of pay.
Blow #1: Supreme Court Defines the “Regular Rate of Compensation” for Meal, Rest and Recovery Violations as Not Just the Employee’s Base Hourly Rate of Pay
In Ferra v. Loews v. Hollywood Hotel, LLC, the California Supreme Court considered whether the Legislature intended “regular rate of compensation” under Labor Code section 226.7, subdivision (c) governing meal, rest or recovery premiums to have the same meaning as “regular rate of pay” under Labor Code section 510 governing overtime premiums. In this case, a bartender working for Loews earned an hourly wage plus quarterly nondiscretionary incentive payments. When she did not receive a compliant meal or rest break, Loews paid her an extra hour of pay at her hourly wage, without factoring her quarterly nondiscretionary incentive payments. Ferra sued, claiming it was error for Loews not to include her quarterly nondiscretionary incentive payments in its calculation of premium pay owed under section 226.7. The trial court and Court of Appeal disagreed, ruling against her.
Reversing the Court of Appeal, the Supreme Court unanimously held that the terms “regular rate of compensation” under section 226.7(c) and “regular rate of pay” under section 510 are synonymous; therefore, meal, rest and recovery period premium pay should include the employee’s base hourly rate, as well as all other nondiscretionary payments.
The Court of Appeal had relied on the principle of statutory construction that “[w]here different words or phrases are used in the same connection in different parts of a statute, it is presumed the Legislature intended a different meaning,” finding that the difference in the terms “rate of compensation” versus “rate of pay” implied a different intended meaning. Disagreeing that these qualifying words were of consequence, the Supreme Court instead focused on the common use of the term “regular rate” in both Labor Code sections. After a lengthy and arduous analysis of the long-standing history and interpretation of the term “regular rate” as applied to overtime wages in Labor Code section 510, it concluded the Legislature would not have referred to the “regular rate” of compensation if it did not mean to include the long-standing meaning of the term “regular rate.” Thus, for purposes of the additional hour of pay for meal, rest and recovery violations, employers now must use the employees’ regular rate of pay.
Blow #2: The Decision Applies Retroactively
The Supreme Court rejected Loews’ request that the decision be applied prospectively, providing several reasons for its decision to backdate the new law, including that its “reading of ‘regular rate of compensation’ in section 226.7(c) is ‘[o]ne very reasonable way to construe’ the phrase” and that Loews was “simply wrong” that ordinary people could not have predicted plaintiff’s interpretation. The Supreme Court’s ruling places a high burden on employers to intuit how it may rule on future issues.
The high court also rejected Loews’ argument that retroactive application would expose employer to “millions” in liability, finding that even if true, it was not clear why it should “favor the interest of employers in avoiding ‘millions’ in liability over the interest of employees in obtaining ‘millions’ owed to them under the law.”
What Does This Mean for Employers Moving Forward?
- Audit Pay Practices to Ensure Compliance: Employers must review and adjust their premium pay practices to ensure that any additional hours of pay owed for non-compliant meal, rest and recovery periods are paid at the employees’ regular rate of pay.
- Pay Restitution: Employers who were seemingly compliant in the past because they actually paid one additional hour of pay for non-compliant meal, rest and recovery periods, may now face additional liability for up to four years if they only paid these premiums at the employees’ base hourly rate instead of their “regular rate of pay.” Accordingly, employers may want to audit premium payments already made and go back and pay any monies owed for the difference, if any, between what they actually paid and the regular rate of pay that they should have paid.
- Reconsider Nondiscretionary Pay Practices: Employers may also wish to audit their nondiscretionary pay practices to determine if it is worth it to continue these additional compensation structures moving forward.
- Enforce Meal and Rest Period Compliance: Of course, if employees take compliant meal, rest and recovery periods, then issues of proper premium pay rates don’t come into play. Employer policies and practices should provide for legally-compliant meal, rest and recovery (if applicable) periods. Employees who fail to comply can be disciplined.
The consequences for failure to correctly calculate the regular rate of compensation for meal, rest and recovery period premiums can be significant. Employees may bring claims against employers not only on an individual basis, but also on behalf of other employees going back up to four years. Employers should contact employment law counsel for assistance in implementing the new law and avoiding legal claims.