In Ferra v. Loews Hollywood Hotel, LLC, the California Supreme Court rejected the longstanding view that meal and rest break premiums are paid at the employee’s base rate, rather than at the more complicated regular rate of pay used to calculate overtime premiums. The court found that the phrase from the rest break requirements (“regular rate of compensation”) is synonymous and interchangeable with the phrases used in the overtime context (“regular rate of pay” and the more general, “regular rate”). The court refused to hold the decision was prospective only, leaving the door open for the decision to be applied retroactively. Thus, California employers will need to examine their meal and rest break procedures and nondiscretionary incentive pay practices to avoid noncompliance.

Background

In 2001, as a disincentive to perceived meal and rest break avoidance, the California Legislature and the Industrial Welfare Commission introduced a penalty for the failure to provide recovery periods, i.e., meal and rest breaks. The penalty is “an additional hour of pay at the employee’s regular rate of compensation.” Since then, employers have generally paid premiums at the employees’ base hourly rate. Over the last ten years or so, a handful of federal courts considered employees’ arguments that the break premiums should be calculated at the overtime regular rate, but almost always disagreed, usually relying on the break penalty law’s use of the phrase “regular rate of compensation” in contrast to “regular rate of pay” consistently used in wage orders and Labor Code section 510(a) when proscribing overtime pay.

Enter the plaintiff, a bartender at the defendant hotel from 2012 to 2014, who argued she should have been paid meal and rest break premiums at a rate that included her quarterly bonuses. The Los Angeles Superior Court and the Second District Court of Appeal rejected her theory, but the California Supreme Court granted review.

The Decision

While California’s wage orders repeatedly use the phrase “regular rate of pay” when describing overtime obligations, the same document only uses the phrase “regular rate of compensation” when describing meal and rest break premiums. This is the distinction relied upon by employers and federal courts in finding that break premiums are paid at the base hourly rate and not the overtime regular rate. However, the court pointed out that the defendant failed to identify any difference in the meaning between the two phrases. Nor could the court find any purpose for the distinction in the legislative history and the history behind the language in the wage orders. The court observed that federal law had long defined “regular rate” in the context of overtime to include nondiscretionary incentive pay and that California had adopted that interpretation decades ago. California cases construing the overtime law often shorten the phrase to “regular rate” further suggesting that “of pay” does not add significant meaning. The court pointed out that the words “pay” and “compensation” are also used interchangeably in the Labor Code. Ultimately, the court held that regular rate of compensation for meal and rest break premiums has the same meaning, and must be calculated the same way, as the regular rate of pay for the overtime premium.

The defendant argued the court should not apply the holding retroactively because the law had never previously been interpreted to require break premiums be paid at the overtime regular rate and doing so could expose employers to “millions” in liability without warning. The court rejected the argument because the holding articulated a previously unsettled issue of statutory interpretation, which is traditionally not entitled to only prospective application. The court stated, “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.”

Example of Regular Rate Calculation

Employers that have been paying nondiscretionary forms of pay to their non-exempt employees in California are likely familiar with calculating the regular rate for the purposes of overtime.1 In most situations, the regular rate is calculated as the weighted average rate based on the compensation paid to the employee. The rate is calculated on a weekly basis. For example, assume an employee works 55 hours in a workweek (40 regular, 13 overtime and 2 double time). Of those 55 hours, 25 are paid at the employee’s base rate of $20 an hour and the remaining 30 hours are paid at $21 an hour to reflect a $1 shift differential. While the employee’s base rate is $20, the employee’s regular rate for this week is $20.55. (Total compensation for the week is $1,130, divided by 55 total hours worked, results in a weighted average rate of $20.55 per hour.) If the employee is entitled to a meal or rest period premium for this week, that additional hour premium should be paid at the regular rate of $20.55, not the employee’s $20 base rate.

Significantly, the regular rate will also increase if an employee is later paid compensation that was earned over a period of time. For example, if an employee is paid a quarterly bonus, that bonus must be apportioned back over the hours worked during the quarter, resulting in an increased regular rate.2 To the extent the employee was paid any meal/rest premiums during that quarter, the employee should also be paid a “true-up” amount reflecting the increased regular rate resulting from the quarterly bonus payment.

Moving Forward

If non-exempt employee populations are also incurring meal and rest break premiums for the same work weeks in which they earn additional forms of pay (e.g., shift differentials, bonuses, commissions, etc.), employers will need to calculate the regular rate with the same method they use for overtime. Employers can also consider eliminating these additional forms of pay to avoid the administrative burden. Employers concerned about exposure for past practices should seek legal counsel.