The California Supreme Court just made it even more difficult to do business in California. Overturning the ruling of two lower courts, on July 15, 2021, the Court held in Ferra v. Loews Hollywood Hotel, LLC that meal and rest premiums must be paid at the “regular rate” not the base hourly rate. The Court’s opinion can be found here.
The central legal question was whether the California Legislature intended that the “regular rate of compensation” under Labor Code section 226.7(c) had the same meaning as “regular rate of pay” under Labor Code section 510(a). The Court unanimously held that “regular rate of compensation” and “regular rate of pay” are interchangeable terms, and therefore “premium pay for a noncompliant meal, rest, or recovery period, like the calculation of overtime pay, must account for not only hourly wages but also other non-discretionary payments for work performed by the employee.”
Plaintiff Jessica Ferra alleged that her former employer, Loews Hollywood Hotel, improperly calculated her meal and rest period premium payments when it excluded her non-discretionary quarterly incentive bonuses from her meal and rest premium pay calculations. At the trial court and Court of Appeal, Loews successfully argued that Plaintiff’s “regular rate of compensation” for meal and rest period premium pay was her base hourly rate of pay. However, following an analysis of legislative history, the California Supreme Court disagreed and reversed the Court of Appeal. The Court concluded that the “regular rate of compensation” for meal and rest period premium pay under California Labor Code section 226.7(c) is synonymous with the “regular rate of pay” for overtime as defined under California Labor Code section 501(a) and the FLSA. Consequently, employers must use the employee’s overtime regular rate of pay, which includes all non-discretionary payments for the work performed, to calculate meal and rest period premiums,.
Regular Rate of Pay
Notably for employers, 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, service charges, 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. Since the regular rate may fluctuate weekly based on additional compensation and number of hours worked, meal period and rest period premiums pay rates may also fluctuate as well! This can be quite a challenge for payroll, and make compliance an uphill battle.
Importantly, the Court also held that because it was interpreting a statute, and not overruling or disapproving any previous case law, its holding applies retroactively (subject to applicable statutes of limitation). Consequently, employees can file claims that reach back up to four (4) years.
Tips for Employers:
For employers who want to avoid litigation, there are some straight-forward options:
- Simplify pay structures, including providing less non-discretionary compensation, shift premiums, production bonuses, commissions, etc. Instead, pay a higher hourly rate. This way the overtime rate does not need to include any extra compensation and premium payments won’t be impacted by weekly rate changes;
- Schedule employee meal periods and rest breaks, and make sure they are timely taken, so there are less meal and rest premiums to pay;
- Consider providing back-pay and/or a release to departing employees;
- Use the same “regular rate” for sick pay (as required by California Labor Code section 246); and
- Consider implementing arbitration agreements in order to prevent potential class actions, especially considering the Court’s ruling is retroactive (although a class action waiver won’t help with PAGA claims).
We will update you as courts throughout California interpret the latest change to the law as set forth in Ferra, and as the Plaintiff’s bar argues for how it expands the scope of pending and newly filed claims.
For help with questions on this subject, please contact your Fox Rothschild LLP California employment counsel or the author.