Following a difficult year of mandatory lockdowns for many businesses, the California Supreme Court issues another decision regarding wages that could have widespread impact on many employers in the Golden State. On July 15, 2021, the High Court held in Jessica Ferra v. Loews Hollywood Hotel, LLC (case number S259172), that meal period and rest period premiums must be paid at the regular rate of pay, not the base hourly rate of pay.

Loews employed Ferra as an hourly nonexempt employee who also received quarterly nondiscretionary incentive payments. If Ferra was not provided a meal or rest period in compliance with California’s requirements, Loews paid her an additional hour of wages (i.e., meal period premium or rest period premium) at her base hourly rate of pay. Her quarterly nondiscretionary incentive payments were not factored into her meal period or rest period premiums.

Ferra filed a class action lawsuit against Loews, and one of the claims alleged that Loews omitted nondiscretionary incentive payments from its calculation of premium pay. Although the trial court and Court of Appeal agreed with Loews that the statutory term “regular rate of compensation” was akin to “base hourly rate” for purposes of calculating meal period and rest period premiums, the California Supreme Court reversed the lower courts. It held that premium pay for noncompliant meal periods and rest periods must be paid using the same regular rate calculation required for calculating overtime wages.

The regular rate of pay may be greater than the base hourly rate of pay if the employer provides additional compensation such as piece work earnings, commissions, nondiscretionary bonuses (including production bonuses and flat sum bonuses), shift differentials, and meals or lodging. Although the increase to the base hourly rate may be minimal in many circumstances, any minimal differences in rates of pay could result in legal claims for back wages and significant penalties. Given that the regular rate can fluctuate based on additional compensation and number of hours worked, this means that meal period and rest period premiums pay rates could also fluctuate.

Additionally, the High Court unambiguously stated that this decision is retroactive. That means that employees can file claims that reach back up to four (4) years (before employers knew to pay premiums at the regular rate of pay). As with many wage and hour claims, any deviation in pay could trigger a series of penalties that significantly overshadow the wage dispute. Conceivably, a 10 cent difference in the regular rate of pay and base hourly rate of pay could result in a claim for thousands of dollars in penalties for each employee.

Consequently, California employers may face a significant increase in wage and hour individual and class action claims in the coming months and years. As such, we recommend that employers review their premium pay calculations to include all appropriate renumerations for purposes of paying meal period premiums, rest period premiums, and overtime wages.