Break out calculators & checkbooks: CA holds meal/rest break penalties include non-discretionary pay

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California has long required employers to pay employees a wage premium that is the equivalent to one hour of regular pay if they are not provided a compliant meal or rest break. This single issue is the subject of countless wage and hour class actions across the Golden State. But on July 15, 2021, the California Supreme Court in Ferra v. Loews Hollywood just made determining the correct amount to be paid a lot more complicated and expensive for employers who offer non-discretionary bonuses or other type of wages such as shift differentials, commissions, and piece-rate compensation.

What were the legal issues in Ferra v. Loews Hollywood?

For the purposes of calculating meal and rest break penalties, the California Labor Code instructs employers to pay one hour of the employee’s “regular rate of compensation.” The phrasing is similar to, but different from, the “regular rate of pay.” While it does not sound like much of a difference, the court of appeals had previously ruled that the phrases had different meanings and that the “regular rate of compensation” used for meal and rest break premiums is just the employee’s base hourly rate, while the “regular rate of pay” is the rate utilized in the overtime context, which must include all nondiscretionary payments (e.g., flat sum bonuses, shift differentials, etc.). In other words, the court of appeals made the calculation for meal or rest break premiums easy – it was simply one hour at the employee’s base straight time rate. 

This reprieve for employers was short lived, as the California Supreme Court ruled that the court of appeals was incorrect and decided that the two terms were a distinction without a difference. Instead, the California Supreme Court held that the “regular rate of compensation” that must be paid for meal and rest break premiums must be calculated like the “regular rate of pay” used in calculating the overtime rate. 

What does this mean when calculating meal and rest break premiums?

California employers now must pay break premiums using the more complex calculation for the regular rate of pay by accounting for all forms of non-discretionary pay, such as shift differentials, non-discretionary bonuses, and similar pay for hours worked. Instead of just paying an employee’s base hourly rate for a meal or rest break premium, the employer must now calculate the applicable regular rate of pay each time a meal or rest break premium is owed.

How is the “regular rate” calculated?

As examples of the various ways in which the “regular rate of pay” could vary from an employee’s base hourly rate, consider the scenario where an employee is paid a base hourly rate of $20/hour with weekly pay periods.

If that employee works 40 hours, with no other kinds of pay:

The employee’s regular rate would be $20.

If that employee works 40 hours and is paid a $100 flat sum attendance bonus

Under the California Supreme Court’s calculation set forth in Alvarado v. Dart Container Corp., 4 Cal. 5th 542 (2018), the employee’s regular rate would be as follows:

If that employee works 20 hours at the employee’s base $20/hour rate, and is paid a shift differential of $10 more ($30/hour) for night and weekend work:
If that employees works 40 hours and also receives a $1000 commission in the same week:

According to the ruling in Ferra, this same employee could theoretically receive meal or rest period premiums in the amount of $20, $22.50, $25, and $45 in four separate pay periods, despite having the same base hourly rate of pay throughout.

Is the ruling retroactive?

Yes, the CA Supreme Court explicitly held that its ruling would be retroactive, thus potentially exposing employers to liability for incorrectly calculating break premiums in the past.

Employers are strongly advised to immediately review and audit their payroll practices, particularly as it relates to the calculation of the regular rate of pay and the rates that it pays meal and rest break premiums.

For more information about how this decision could impact your organization, please contact one of the authors of this post or the Hogan Lovells lawyer with whom you work.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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