In Ferra v. Loews Hollywood Hotel, LLC, the California Court of Appeal considered the method for determining the amount of the one hour of pay at the employee’s “regular rate of compensation” for each workday in which an employer fails to provide a meal, rest or recovery period as required by Labor Code Section 226.7. In recent years, plaintiffs have argued in class actions that the method for determining the “regular rate of compensation” under 226.7 must be the same as that used for calculating the “regular rate of pay” for overtime purposes under Labor Code Section 510 and the Industrial Welfare Commission Wage Orders, and must therefore include all forms of compensation, including commissions and other nondiscretionary pay, earned during that pay period. In the absence of any prior California published court decision on the issue, the Ferra court looked to legislative history as well as federal court opinions for guidance. 

Following a lengthy analysis, the Court of Appeal ultimately concluded that “regular rate of compensation” requires payment at the base hourly rate only and does not have the same meaning as the “regular rate of pay” used for the purposes of calculating overtime. The court held that treating the phrases the same would omit “the difference between requiring an employer to pay overtime for the time an employee spends working more than 40 hours a week, which pays the employee for extra work, and requiring an employer to pay a premium for missed meal and rest hour periods, which compensates an employee for the loss of a benefit.”

The Ferra case provides some much-needed clarity for employers on an issue that exposed many employers to potential liability.  However, Ferra may not be the last word on the issue.  In view of the lack of prior precedent, and in light of a strong dissent in Ferra which argues that the Legislature would not have “obscurely” decided such an important public policy matter, we undoubtedly will see further court action pending a final determination by the California Supreme Court or a statutory amendment from the Legislature.