“Let me get this straight. To the delight of our workers, we’ve been providing free meals. But now someone is claiming that I owe unpaid overtime to account for the value of the free meals? Really??”
We have been hearing this kind of exasperated response from clients with more frequency, as many employers have made the business choice to provide their employees with lunch at no cost. Many of these same employers are being accused of underpaying overtime by failing to incorporate the value of free food in calculating the regular, overtime, and double-time rates of pay. Talk about a funny way to give thanks!
Companies provide free food to employees for many legitimate business reasons: to help limit lunch breaks to 30 minutes, to encourage employees stay close to the job site during lunch breaks in case of emergencies, to avoid food waste and related disposal costs in industries where more food is prepared than the customers will consume (i.e., menu options), and to build workforce camaraderie by encouraging employees to take their lunch breaks together. This just a small sampling of reasons an employer might decide to feed its workforce. And not all free food needs to be considered in the computation of overtime. But sometimes companies enact such free lunch policies without due consideration of the rules and possible legal ramifications.
As the plaintiffs’ bar clearly understands, California defines wages as “all amounts for labor performed by employees.” California overtime and double time are computed based on an employee’s regular rate of pay, which includes cash and other types of remuneration. Labor Code §§ 200, 510.
Increasingly, employers are seeing complaints that argue, essentially, if an employee earns $9 an hour and gets a free turkey sandwich for lunch, the sandwich is part of the “amounts for labor performed.” Therefore, plaintiffs argue, the value of the food should be factored into the employee’s regular rate, so that the corresponding rate of payment for any overtime worked should be increased by the per-hour value of a couple slices of turkey and bread! For example, if the value of the sandwich is $4.00, and is provided five days a week, the employee is getting an extra $20 per week in “other remuneration” that, plaintiffs argue, would make the regular rate for overtime computation not just $9/hour, but something more (depending on the number of hours worked in the week).
Unfortunately, this is no Thanksgiving prank. Free food regular rate miscalculation cases have actually been around in California since the Seventies (e.g., Marshall v. Valhalla Inn, 9th Cir. 1979: “The regular remuneration … consisted of the wages … plus the value of the meal provided … . The amount of such payments must therefore be included in determining the overtime rate.”). But this “gotcha” category of lawsuits, which defy common sense, have recently come into vogue. Worse still, theoretically similar claim types have evolved in response to similar food-related company policies.
Some lawsuits, for example, attack the practice of giving employees a discount on cafeteria food, claiming that the value of the discount should be included in calculating overtime rates (“If you charge me $1 for a $4 sandwich, that’s $3 more to my regular rate computation.”).
Other lawsuits claim that employers miscalculate overtime when they incorporate the employer’s cost of the food provided into the overtime calculation rather than incorporating the fair market value of the food provided to the employee into the overtime calculation.
These lawsuits actually work against the interests of employees, as they inspire an unsurprising employer response: cancellation of free and discounted meal policies. Are there effective alternatives to the drastic cancel-the-policy solution to this problem? Yes, but only careful consideration of each employer’s relevant facts and circumstances, coupled with careful drafting of free-lunch policies and procedures, will avoid liability for miscalculating overtime and double time rates:
Meals Furnished as a Convenience to the Employer. Federal and state law both hold that meals furnished to employees as a “convenience to the employer” are excluded from the regular rate of pay. Although neither the Labor Code nor case law provide much guidance on what this means, the federal regulations (which California courts consider in regular rate calculation matters when state law is silent) provide a two-part test for excluding meals from rate calculations: (1) the meals are furnished on the employer’s premises, and (2) the meals are furnished for the convenience of the employer. 29 CFR § 1.119-1(a)(1). “Convenience of the employer” is a somewhat nebulous standard at the heart of the exclusion test, but the regulations suggest it can be met in a variety of circumstances, including, for example, where (1) meals are furnished to the employee to have the employee available for an emergency call during the meal period and there is evidence such emergency calls do occur, (2) the employee “must” be restricted to a “short meal period” (described as 30-45 minutes) and the employee could not be expected to eat elsewhere in such a short period, and (3) meals are furnished during working hours because the employee could not otherwise secure a meal within a reasonable time (though it is unclear whether “working hours” would include an off-duty meal period under California law), 29 CFR § 1.119-1(a)(2)(ii).
Agreement to Exclude One Meal Per Day From the Employee’s Regular Rate. The regulations also “permit the employer upon agreement with his employees to omit from the computation of overtime the cost of a free daily lunch or other single daily meal furnished to the employees.” 29 CFR § 548.304; 548.3(d). Presumably, this agreement can be oral or in writing; the regulations do not specify (though written agreements would likely be advisable from an evidentiary standpoint). Further, this provision appears strictly limited to employees receiving only one free meal each day, which presents a challenge for employers hoping to employ the free cafeteria model to their workforce but struggling to limit employees to just one free meal a day.
There is no one-size-fits-all solution to the regular rate challenges associated with feeding employees. But the first step to crafting a solution that fits your company is to realize the potential regular rate trap hiding between the bread and the turkey in your employee’s sandwich.
Of course, if you are grappling with a free lunch dilemma of your own, please do not hesitate to contact us and we would be happy to help assess your company’s options and propose policy changes specifically tailored to your company going forward.
Happy (early) Thanksgiving!