Earlier this month, a California Court of Appeal issued an opinion that is good news for California employers. The opinion addressed the meaning of “regular rate of compensation” in California Labor Code section 226.7, which requires employers to pay employees a premium wage when employees do not receive meal or rest periods, and also addressed under what circumstances an employer’s rounding policy is lawful. The court’s opinion is favorable on both points for employers.

In Jessica Ferra v. Loews Hollywood Hotel, LLC, the Court of Appeal addressed whether the term “regular rate of compensation” within Labor Code section 226.7 has the same meaning as the term “regular rate of pay” within Labor Code section 510. Labor Code section 226.7 requires an employer that fails to provide its employee with a required meal, rest or recovery period to pay the employee an additional hour of pay “at the employee’s regular rate of compensation for each workday that the meal or rest or recovery period is not provided.” Labor Code section 510 requires an employer to pay overtime at either one and one-half or twice the employee’s regular rate of pay when the employee works more than a specified number of hours within a workday or within a workweek.

Although the issue may appear merely academic, its resolution is consequential for employers. Regular rate of pay within Labor Code section 510 is not the same as the employee’s straight-time rate of pay (i.e., his or her normal or base hourly rate of pay), and an employer must include additional forms of compensation, such as split-shift differentials and nondiscretionary bonuses, when calculating the applicable regular rate of pay. California generally follows the approach taken by the federal Fair Labor Standards Act in interpreting regular rate of pay to include the per-hour value of nondiscretionary compensation received by nonexempt employees. If the court in Ferra accepted the plaintiff’s argument that the terms “regular rate of pay” and “regular rate of compensation” were synonymous, California employers that have been paying meal and rest period premiums at only the straight-time hourly rate would have faced potentially substantial liability for past practices. It would also have been essential for such employers to promptly correct their practices going forward.

The Court of Appeal reasoned that the California Legislature, by using a different term within Labor Code section 226.7 (i.e., regular rate of compensation rather than regular rate of pay), must have intended that the terms have a different meaning. The court also discerned a different purpose for Labor Code section 226.7 from that for Labor Code section 510. Although the primary purpose for section 510, which provides for overtime pay, is to pay the employee for extra work, the purpose of section 226.7 is primarily to compensate an employee for the loss of a meal or rest period to which the employee is legally entitled.

One of the judges wrote a vigorous dissent disagreeing with the majority’s conclusion. Her view is that regular rate of compensation has the same meaning as regular rate of pay. The majority opinion is binding, however, on all California trial courts until and unless overruled by the Supreme Court of California or rejected by another California appellate court.

Furthermore, the court held that the employer’s rounding practice complied with California law. Employers in California may lawfully use a rounding policy if the policy is “fair and neutral on its face” and “is used in such a manner that it will not result, over a period of time, in failure to compensate employees properly for all the time they have actually worked.” Because the employer’s rounding policy rounded employee time punches up or down to the nearest quarter hour neutrally (i.e., based on whatever quarter hour was closer to the time punch), it easily met the “fair and neutral on its face” standard. The plaintiff argued that the employer’s policy was not neutral as applied, however, and systematically undercompensated employees because the data showed that both the plaintiff and a sample group of nonexempt employees lost time in a majority of shifts. For the sample group, paid time was reduced in 54.6% of shifts, was added in 26.4% of shifts and in the remaining portion of shifts, paid time was not affected. The court concluded that a rounding system can be fair and neutral even where a small majority loses compensation. In other words, to be lawful, a rounding policy need not overall benefit employees or average out to zero, such that employee gains from rounding that adds time equally offset losses from rounding that deducts time worked. Although the court’s decision is favorable to employers, ambiguity remains as to the circumstances in which a rounding policy that is fair and neutral on its face could nevertheless be applied in a manner that is unlawful.

Takeaway: Although this decision may not be the final word on these issues, California employers should cheer this decision clarifying their obligations regarding meal and rest period premium pay and appropriate rounding of employee time.