California High Court Interprets “Regular Rate of Pay”

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The California Supreme Court’s recent interpretation of a California labor statute is sure to have a tremendous impact on employers in the state. By determining that “regular rate of compensation” under Labor Code § 226.7(c) is synonymous with “regular rate of pay” under Labor Code § 510(a), the court ruled that premium payment calculations for missed meal and rest breaks must take all nondiscretionary payments into account. Ferra v. Loews Hollywood Hotel, LLC, 11 Cal 5th 858 (Cal. S. Ct. 2021).

The case was brought by plaintiff Jessica Ferra, an ex-employee of defendant Loews Hollywood Hotel LLC. In her complaint, Ferra alleged Loews violated California Labor Code § 226.7(c) by miscalculating the premium payments she was given after missing a meal or rest break. While Loews had given Ferra premium payments based on her hourly wage, Ferra argued that premium payment calculations should account for all nondiscretionary payments as well. The dispute arose because of a difference in statutory language found within separate sections of California’s Labor Code.

Under Labor Code § 510(a), an employer is required to pay an employee an increased rate for any overtime hours. According to the statute, the increased rate is determined by multiplying⁠—either by 1.5 or 2, depending on the number of hours worked⁠—the employee’s “regular rate of pay.” When employers determine an employee’s “regular rate of pay” for overtime purposes, all nondiscretionary payments are to be taken into account. This means all payments that are owed “pursuant to a prior contract, agreement, or promise”⁠—and therefore not subject to the employer’s sole discretion⁠—are part of an employee’s regular rate of pay.

Under Labor Code § 226.7(c), however, when an employee misses a meal or rest break, an employer must pay the employee a premium payment that is equal to one hour of pay at the employee’s “regular rate of compensation.” Because this language differs from § 510(a)’s mandate, several courts have ruled that employers may exclude everything but an employee’s base hourly wage when calculating premium payments for missed meal and rest breaks. Indeed, in Ferra’s case, both the trial court and the California Court of Appeal held that Loews had not violated § 226.7(c) when it made premium payments based solely on Ferra’s base hourly wage. The lower courts came to this conclusion by relying on the principle of construction that “where different words or phrases are used in the same connection in different parts of a statute, it is presumed the Legislature intended a different meaning.” For the lower courts, because the terms “regular rate of pay” and “regular rate of compensation” differ, premium payments made pursuant to the two sections should not be calculated in the same manner.

The California Supreme Court, however, chose to rely on a separate principle of construction providing that “where statutes use synonymous words or phrases interchangeably, those words or phrases should be understood to have the same meaning.” After examining the legislative history behind the two labor code sections, the California Supreme Court determined that “compensation” and “pay” were synonymous words used interchangeably, and therefore premium payments under both sections should be calculated in the same manner.

The court then ruled that its decision would apply retroactively because “a judicial construction of a statute is an authoritative statement of what the statute meant before as well as after the decision of the case giving rise to that construction.” In rejecting Loews’ argument that the decision should apply only prospectively, the court reasoned that employers had no basis for relying on previous trial, appellate and federal district court decisions ruling that premium payments under the two sections should be calculated differently. Because the California Supreme Court had not previously ruled on the matter, it did not believe employers could “claim reasonable reliance on settled law.”

Given these rulings, California employers are to update their methods of calculating premium payments for missed meal and rest breaks. Under the California Supreme Court’s ruling, all non-discretionary payments must be accounted for when calculating an employee’s regular rate of compensation. Moreover, given the breadth of this ruling, California employers would be wise to closely examine their potential liability for past calculations and consider implementing a restitution payment program to employees who received premium payments at the base rate rather than the regular rate of pay as determined by the California Supreme Court.

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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