The California Supreme Court on July 15, 2021, finally and conclusively resolved a long-unsettled question of California wage and hour law, likely to the detriment of most California employers. In Ferra v. Loews Hollywood Hotel, LLC, the Court ruled that "premium pay" — the penalty payment which must be made under Labor Code Section 226.7 for failing to provide a compliant meal, rest or recovery period — is equal to the "regular rate of pay" used for overtime payment purposes under Labor Code Section 510. Previously, employers arguably could pay premium pay at an employee's base hourly rate.

Under Ferra, premium pay must now be paid at the "regular rate of pay," which accounts for all nondiscretionary payment during a pay period, including straight time, shift differentials, piece-rate compensation, commissions and nondiscretionary bonuses. The "regular rate of pay" may also fluctuate from pay period-to-pay period, depending on what nondiscretionary compensation is due and owing to an employee for any particular pay period.

Calculating the Applicable "Regular Rate of Pay"

To illustrate how the regular rate of pay is calculated, and therefore how a premium payment amount can fluctuate from pay period to pay period, consider a hypothetical employee in the following different scenarios.

• The employee is paid at a base hourly rate of $20/hour. If this employee works no overtime during a 40-hour pay period, the regular rate of pay is $20 per hour for that pay period.
• The employee is paid at the base hourly rate of $20 per hour plus $10 per widget. If the employee works 40 hours during the pay period and makes 40 widgets during that pay period, the employee's regular rate of pay is equal to $30 per hour, i.e., [$20 per hour x 40 hours] + [$10 per widget x 40 widgets] divided by 40 hours worked in the pay period.
• Using the same example as above, except the employee manufactures 30 widgets during that same 40-hour pay period. Here, the regular rate of pay is $27.50 per hour.
• The employee is paid at a base hourly rate of $20 per hour plus a shift differential of $5 per hour more for certain hours. If the employee works 20 straight hours and 20 shift differential hours during the pay period, the regular rate of pay is equal to $22.50 per hour, i.e., [$20 per hour x 20 hours] + [$25 per hour x 20 hours] divided by 40 hours.
• The employee earns a salary of $41,600 per year and is paid a year-end nondiscretionary of $10,000. The regular rate of pay is equal to $24.80 per hour (assuming all else is equal across the pay periods throughout the year).
• The employee is paid $50 per hour plus a quarterly bonus equal to 10 percent of revenue during the quarter attributable to the employee's accounts. There are two pay periods in the quarter, each of equal length. During the first pay period, the employee works 100 hours. During the second pay period, the employee works 80 hours. The revenue for the quarter attributable to the employee's accounts equals $4,000, or $2,000 per pay period. The employee's regular rate of pay for the first pay period equals $52 per hour, and the employee's regular rate of pay for the second pay period equals $52.50/hour.

Calculating the regular rate of pay can be cumbersome and complex because it fluctuates from week to week depending on the number of hours worked and various other factors. This fluctuating regular rate of pay is now what must be used for meal, rest and recovery break premium penalty payments.

Conclusion and Considerations

Critically, the ruling in Ferra is retroactive and employers may now face liability for previous practices of paying premiums at the base rate of pay. Accordingly, all employers are strongly encouraged to review their payroll practices for California employees to determine whether, in the past four years, premium payments were issued at the base hourly rate of pay or at the regular rate of pay used for overtime purposes. Employers may also wish to audit payment history and issue true-up payments if necessary to proactively manage liability.