In July 2021, the California Supreme Court issued a strong, retroactive mandate to California employers in the matter of Ferra v. Loews Hollywood Hotel, LLC.  — P.3d – (2021 WL 2965438).  Pursuant to the decision, when an employee misses a meal or rest period, or takes a non-compliant meal or rest period (i.e., one that is late or short), the employee must be paid an extra hour of pay at his or her “regular rate of pay,” not just his or her base hourly rate of pay.  Moreover and significantly, this new decision applies retroactively.

California’s General Rules for Meal, Rest and Recovery Period Premiums

In general, California requires employers to provide employees with an unpaid 30-minute meal period that begins no later than the end of the fifth hour of work and a second unpaid 30-minute meal period beginning no later than the end of the tenth hour of work. Employers must also provide a 10-minute paid rest break for every four hours worked.  This generally occurs about every two hours.  Finally, the employer is also required to provide recovery breaks, or “cool down” periods, of at least five minutes on an “as needed” basis to employees who work outdoors.

Under California Labor Code section 226.7 subdivision (c), if an employer does not provide an employee with a compliant meal, rest or recovery period, the employer must pay the employee one additional hour of pay at the employee’s “regular rate of compensation”. In the past, employers typically paid this additional hour of pay at the employee’s base hourly rate of pay.

Regular Rate of Pay for Overtime 

Pursuant to California Labor Code section 510, employers must provide overtime premium pay at the employee’s “regular rate of pay” when employees work more than a certain amount of time in a workday or workweek.  California courts have interpreted the phrase “regular rate of pay” to mean an employee’s base rate of compensation plus any adjustments to that rate arising from additional compensation the employee receives, which can include compensation like shift differentials, bonuses, and commissions. Essentially, the regular rate of pay is not just the employee’s base hourly rate of pay, but also includes these other forms of compensation.

In Ferra, the Supreme Court Defines the “Regular Rate of Compensation” for Meal, Rest and Recovery Violations to Include More than Just the Employee’s Base Hourly Rate of Pay

In Ferra, the California Supreme Court considered whether the Legislature intended “regular rate of compensation” under Labor Code section 226.7, subdivision (c) governing meal, rest or recovery premiums to have the same meaning as “regular rate of pay” under Labor Code section 510 governing overtime premiums.  Ferra v. Loews v. Hollywood Hotel, LLC, — P.3d – (2021 WL 2965438).  Ferra involved a bartender working for Loews, who received not only hourly pay but quarterly nondiscretionary incentive payments.  On days when Ferra did not receive a compliant break, Loews paid her an extra hour of pay at her hourly wage without regard for her incentive payments.  Ferra sued and claimed that Loews committed an error in failing to include her incentive payments in its calculation of premium pay.  The trial court and the Court of Appeal disagreed and ruled against Ferra.

The California Supreme Court reversed the Court of Appeal and unanimously held that the term “regular rate of compensation” under section 226.7 and “regular rate of pay” under section 510 were synonymous.  As such, any meal, rest and recovery period premium must now include the employee’s base hourly rate in addition to all other nondiscretionary payments.

California Employers Beware: The Decision Applies Retroactively

The Supreme Court rejected Loews’ request that the decision be applied prospectively.  The Court held “[b]ecause our reading of ‘regular rate of compensation’ in section 226.7(c) is ‘[o]ne very reasonable way to construe’ the phrase, Loews ‘is simply wrong when it argues that ordinary people could not have predicted plaintiff’s interpretation, and that it would violate defendant’s due process rights to adopt that interpretation.’”

After Ferra: What Can Employers Do Moving Forward? 

• Audit Pay Practices to Ensure Compliance: Employers must review and adjust their premium pay practices to ensure that any additional hours of pay owed for non-compliant meal, rest and recovery periods are paid at the employees’ base hourly rate plus nondiscretionary pay.

 

• Pay Restitution: Employers may want to audit premium payments already made and offer additional monies owed for the difference, if any, between what the employer actually paid and what amount should have been paid pursuant to Ferra.

 

• Reconsider Nondiscretionary Pay Practices: Employers may also wish to audit their nondiscretionary pay practices to determine if it is beneficial to continue these additional compensation structures moving forward in light of the additional administrative burdens now imposed.

 

• Enforce Meal and Rest Period Compliance: Obviously, if employees are taking compliant breaks, then proper payment of premiums will not arise.  As such, employer policies and practices should provide for legally compliant meal, rest and recovery (if applicable) periods. Employees who fail to comply may be disciplined.