Pay Up! CA Supreme Court Holds Incentive Payments to Be Included in Calculation of Premium Pay

Lewitt Hackman
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Lewitt Hackman

In another detrimental decision for employers, that has retroactive application, the California Supreme Court just complicated calculation of premium pay owed for non-compliant breaks – holding it must include all nondiscretionary payments, similar to overtime pay requirements.

“Regular Rate of Pay” vs. “Regular Rate of Compensation”

California and federal rules require employers to include nondiscretionary incentive payments in the calculation of overtime. State Labor Code §510, which governs overtime requirements, refers to this weighted amount as the “regular rate of pay”. California law further requires employers to pay employees “one additional hour of pay at the employee’s regular rate of compensation” for each workday that a full and timely break was not provided.

In Ferra v. Loews, the dispute was whether the term “regular rate of pay” has the same meaning as “regular rate of compensation.” The California Supreme Court determined the answer is yes.

Background

Plaintiff, Jessica Ferra, worked at Loews Hollywood Hotel, LLC as a bartender from June 2012 through May 2014. Loews paid Ferra hourly wages as well as quarterly nondiscretionary incentive payments (i.e., payments that are owed per a contract or a policy).

In 2015, Ferra filed a class action against Loews and claimed that the nondiscretionary incentive payments should have been included in the calculation of premium pay. The trial court granted summary adjudication for Loews on the ground that calculating premium pay according to an employee’s base hourly rate was proper, and the Court of Appeal affirmed.

Supreme Court Decision

On review, the Supreme Court disagreed with the lower courts’ decisions. The Supreme Court reasoned that there is no indication “the Legislature intended “regular rate of pay” in section 510(a) and “regular rate of compensation” in section 226.7(c) to have different meanings.” In reaching this conclusion, the Court relied on the following:

The term “regular rate” in the federal Fair Labor Standards Act has the same meaning as the term “regular rate of pay” as used in section 510(a). Loews cited no authority that had trained attention on the modifier “of pay.”

Legislative history reflects (1) the Industrial Welfare Commission (IWC) used the term “regular rate of compensation” interchangeably with the term “regular rate of pay,” and (2) the IWC approach to premium pay was analogous to its approach to overtime pay.

The terms “pay” and “compensation” were previously used interchangeably in case law. Accordingly, the Court reasoned it was unlikely the Legislature and the IWC decided to create a distinct meaning to the term in the year 2000.

Construing “regular rate of compensation” to include only base rate would produce consequences that the Legislature likely did not intend. This would go against the purpose of the break premium requirement, which is to shape “employer conduct to comply with labor standards.”

Conclusion

The Loews decision may not only further deter employers from utilizing incentive payment plans but will likely expose California employers to costly claims and litigation (given the retroactive application of the decision). Employer compliance is more important than ever, specifically in view of the Supreme Court statement rejecting prospective application:

It is not clear why we should favor the interest of employers in avoiding “millions” in liability over the interest of employees in obtaining the “millions” owed to them under the law.

We cannot emphasize this enough: Review your policies, update if needed, train employees about overtime and breaks, and properly pay all wages and premiums owed. A few proactive actions now may go a long way in defending costly wage and hour claims.

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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