The California Supreme Court ruled on July 15 that California employers must calculate nonexempt employees’ meal, rest, and recovery period premium payments based on both hourly wages and any other nondiscretionary wage payments. This is the same method employers must use when they are calculating an employee’s “regular rate” for overtime purposes. The court ruled that its decision applies retroactively.

FERRA V. LOEWS HOLLYWOOD HOTEL, LLC

California Labor Code Section 226.7(c) requires employers to pay employees one hour of pay “at the employee’s regular rate of compensation” for each workday that a meal, rest, or recovery period is not provided. The central issue before the California Supreme Court was whether “regular rate of compensation” in Section 226.7(c) has the same meaning as “regular rate of pay” in the context of overtime premium pay. Under California law and the Fair Labor Standards Act (FLSA), an employee’s “regular rate” for overtime purposes must be calculated using both hourly wages and other nondiscretionary wage payments, such as nondiscretionary bonuses, commissions, and shift differentials. The plaintiff, a bartender, was paid an hourly wage and received quarterly nondiscretionary incentive payments. However, the employer paid the plaintiff meal and rest period premiums at her base hourly rate.

The trial court and court of appeal had both ruled that meal and rest period premiums could be paid at an employee’s base hourly rate because “compensation” should be interpreted differently than “pay.” But after reviewing how “regular rate” has been interpreted in California and federal law and the legislative purpose behind Section 226.7, the California Supreme Court determined that the legislature intended the phrases to be synonymous. As a result, “regular rate of compensation” under Section 226.7 means payment at the same “regular rate of pay” used to calculate overtime pay, including both hourly wages and nondiscretionary payments in the calculation. In light of this holding, employers with nonexempt employees whose compensation includes nondiscretionary payments such as bonuses, commissions, shift differentials, and other incentive pay should ensure that the hourly rates used to pay meal, rest, and recovery period premiums are the same as the higher “regular rate” used to calculate overtime pay.

NONDISCRETIONARY PAYMENTS DEFINED

The court defined “nondiscretionary payments” to mean “payments for an employee’s work that are owed pursuant to a prior contract, agreement, or promise, not determined at the sole discretion of the employer” (internal quotes and brackets omitted), which is consistent with the FLSA definition.

THE DECISION APPLIES RETROACTIVELY

The court ruled that its decision applies retroactively, rejecting the employer’s argument that considerations of fairness and public policy warranted only prospective application. As a result, employers should assess the impact of the retroactive application of the ruling and, if necessary, change their California practices. Employers should also review their pay practices concerning other California laws that use the phrase “regular rate.”

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