The California Supreme Court holds that "regular rate of compensation" used for calculating meal and rest period premiums is identical to "regular rate of pay" used for calculating overtime premiums, which includes hourly wages as well as nondiscretionary payments.
In a long-awaited decision, Ferra v. Loews Hollywood Hotel, LLC, No. S259172 (Cal. 2021), the California Supreme Court unanimously held that the term "regular rate of compensation" under California Labor Code § 226.7(c) is synonymous with the term "regular rate of pay" under California Labor Code § 510(a). Accordingly, "regular rate of compensation" encompasses nondiscretionary payments in addition to hourly wages.
Under Labor Code § 226.7(c), an employer that does not provide an employee with a compliant meal or rest period must "pay the employee one additional hour of pay at the employee's regular rate of compensation." In Ferra, a former hotel bartender brought a class action alleging that Loews failed to comply with section 226.7(c) by omitting nondiscretionary quarterly incentive payments from its calculation of noncompliant meal and rest period premiums. A central issue in the case was whether the phrase "regular rate of compensation" had the same meaning as "regular rate of pay" for calculating overtime premiums, which includes nondiscretionary payments. Both the trial court and court of appeal ruled for Loews, holding that "regular rate of compensation" and "regular rate of pay" did not have the same meaning and that meal and rest period premiums must be paid at the employee's base hourly wage.
The California Supreme Court disagreed, reversing the court of appeal's decision and remanding for further proceedings. Upon review of the legislative history, the court concluded that, without any evidence to the contrary, the Legislature intended "regular rate of compensation" and "regular rate of pay" to share the same meaning. The court rejected Loews' contention that by using two different terms, the Legislature intended two different meanings. The court noted that federal overtime provisions and California wage orders use the terms "compensation" and "pay" interchangeably. Further, the court stated its interpretation comports with the purpose of the Labor Code and general guidance that the "state's labor laws are to be liberally construed in favor of worker protection." The court also rejected Loews' request that its decision apply only prospectively.
In light of Ferra, employers who offer their non-exempt employees nondiscretionary bonuses, commissions, and other compensation that must be included in calculating an employee's regular rate of pay must ensure those payments are included when calculating the amount of premium pay owed for meal and rest period violations.