In Ferra v. Loews Hollywood Hotel, LLC, the California Supreme Court concluded that when an employer fails to provide an employee with a compliant rest or meal break, the employee is entitled to a premium payment of one hour of pay at the employee’s “regular rate of pay,” as opposed to an hour of pay at the agreed upon base hourly or straight-time rate of pay. In doing so, the Court sought to maximize protections for employees by requiring employers to factor bonuses and other non-discretionary compensation into the break premium rate of pay. Otherwise, the Court claimed, employers would be incentivized to depress employees’ hourly wages in favor of non-hourly incentive compensation.
The highly anticipated Ferra decision is another example of the Court construing California’s labor laws in a manner that ensures higher pay to employees and that creates significant liability for employers, despite contrary guidance furnished by the state’s labor law enforcement agencies and courts. The decision confirms that California employers seeking to avoid wage and hour liability should adopt payroll practices that err on the side of overpayments absent clear controlling legal authorities.
The Ferra case is also a reminder that significant wage and hour litigation in California often has nothing to do with an employer’s improper conduct, and is instead caused by unnecessarily vague and imprecise legal requirements and a lack of controlling guidance from the state’s legislature and labor agencies, bolstered by an aggressive plaintiffs’ bar committed to exposing every such ambiguity and alternative interpretation through class action and PAGA cases.
The Court’s Analysis Aimed at “Employee Protections”
The Court’s ruling in Ferra rested on its interpretation of Labor Code section 226.7, which requires an employer to “pay the employee one additional hour of pay at the employee's regular rate of compensation for each workday that the meal or rest or recovery period is not provided.” This additional hour of pay is commonly referred to as a break premium.
The precise issue in Ferra was whether the Legislature intended “regular rate of compensation” to: (1) have the same meaning as “regular rate of pay,” as used in California’s overtime statute, section 510(a); or (2) have an independent meaning, requiring premium payments at the employee’s “base” rate of hourly pay.
The Court agreed with the first proposition, finding that the “regular rate of compensation” and the “regular rate of pay” are one and the same.
To some, the outcome was predictable because the Court has consistently “liberally construe[d] the Labor Code and wage orders to favor the protection of employees.” to form, the Court’s decision in Ferra ensures break premiums will be paid at the more “protective”—i.e. higher—of the two rates of pay in consideration.
Under California law, the “regular rate of pay” has been given the same meaning as the federal “regular rate.” An employee’s “regular rate” is always the same as or greater than his or her base hourly rate of pay. That is because the “regular rate” accounts for base hourly compensation and differential rates of pay (e.g. shift premiums), non-discretionary bonuses, and several other forms of non-discretionary payments.
In the Court’s view, if the “regular rate of compensation” under section 226.7 meant the base hourly rate of pay, “employers would be incentivized to minimize employees’ base hourly rates and shift pay elsewhere, thereby harming employees who are paid in some form other than a base hourly rate.”
The Court’s interpretation in Ferra is contrary to those of the Court of Appeal below and numerous federal district courts in prior decisions.
Retroactive Result and No Reasonable Reliance for Employers
In Ferra, the Court also held that its decision applies retroactively because “no considerations of fairness or public policy warrant [prospective application].” Employers who had relied on contrary guidance in good faith would presumably disagree.
California’s labor law enforcement agency, the DLSE, has made an “unmistakable distinction between ‘regular rate of compensation’ and ‘overtime rate’” in its enforcement manual, as pointed out by Loews. Additionally, the California Labor Commissioner has repeatedly ordered employers to pay break premiums based on employees’ base hourly rates, as opposed to the higher regular rates. Also, as noted, the Court of Appeal below and various federal district courts reached a different conclusion than the California Supreme Court in Ferra. Employers’ decisions are often made in reliance on such guidance and decisions. The Court, however, was unpersuaded.
In the Court’s view, employers “cannot claim reasonable reliance” unless the Court has “previously spoken” on the issue. And when the Court speaks, it will presumably interpret the Labor Code and wage orders with the reasonable construction that most closely adheres to the guidance that the “state's labor laws are to be liberally construed in favor of worker protection.”
The “Bonus Buster”?
Ferra may be the California Supreme Court decision that leads California employers to say farewell to certain non-discretionary bonus programs.
When non-exempt employees earn a non-discretionary bonus over multiple pay periods, employers must pay the bonus and any additional overtime compensation “due on the bonus” because the bonus increases the “regular rate” during the bonus period. After Ferra, it would seem those employers also must pay additional break premium compensation due on the bonus for the same reason.
The Court’s decision in Alvarado v. Dart Container led many employers to consider dropping incentive bonus plans. In Alvarado, the Court set a new standard for calculating overtime due on certain attendance bonuses, departing from DLSE guidance on the same subject and creating an additional computation for bonus-paying employers.
If Alvarado put employers near a tipping point, Ferra could send them over the edge, as it may prove administratively infeasible to pay monthly, quarterly, or annual bonuses that require a “lookback” recalculation of all overtime, double-time, and break premiums during the bonus period. The Ferra decision supports the old cliché that “no good deed goes unpunished.” It may signal a Ferra-well to non-discretionary bonuses for many employers.
Risk Avoidance and a Call to Action
Ensure you are paying meal and rest break premiums based on the regular rate – the same rate used to calculate employees’ overtime rate of pay. If non-exempt employees can earn a non-discretionary bonus over multiple pay periods, ensure that your payroll processes and/or providers will provide additional compensation for any break premiums paid during the bonus period (along with additional compensation for any other payment-based on the “regular rate”). Also, consult with counsel to ensure the payroll calculations and resulting wage statements are compliant with California’s onerous standards.
Once the above measures are in place, join the chorus of Californians speaking to their state representatives and demanding reform. Private Attorneys General Act (“PAGA”) lawsuits have generated hundreds of millions of dollars for the state and those funds are not being used as intended. The Legislature required those funds to be used “for enforcement of labor laws … and for education of employers and employees about their rights and responsibilities under this code.” Lab. Code § 2699(i). Despite sufficient funding from PAGA settlements, and years of protracted litigation over technical wage statement issues, timekeeping requirements, suitable seating, and other highly technical issues, the state’s labor agencies have failed to issue clear guidance to employers making them aware of their obligations. Instead, the state’s 2020‑21 budget plan provided for $107 million from the PAGA settlement fund to be transferred to the General Fund. (See https://lao.ca.gov/Publications/Report/4274#top.)
While employers relying on labor agency guidance may not be immune from individual or class claims, like those in Ferra, such reliance should serve as a defense in PAGA actions seeking civil penalties on behalf of the same labor agency. Most, if not all, employers seek to comply with the law. It is simply difficult to do so in the dark or when the rules keep changing.