For decades in the twentieth century, California’s Industrial Welfare Commission (“IWC”) wage orders required employers to provide employees with meal and rest breaks. However, the rules had no real teeth. The Labor Commissioner had no authority to issue a citation to an employer or impose a civil penalty for a violation. The agency’s remedy was limited to seeking an injunction ordering an employer to comply. As a result, employee complaints to the Labor Commissioner about meal and rest break issues received low priority. In response to a complaint, the agency would send a letter to the employer and inform the employer of the requirements, seeking to have the employer obey.
In 1999, the Legislature and Governor enacted Assembly Bill 60 (“AB 60”), the Eight-Hour Day Restoration and Workplace Flexibility Act. Effective in 2000, the legislation generally reinstated daily overtime after eight hours in a workday in California. It wrote the state’s overtime mandates into the Labor Code for the first time. Thus, Labor Code Section 510(a) has required California employers to pay overtime based on an employee’s “regular rate of pay".
AB 60 also directed the IWC to adopt new wage orders by June 30, 2000, specifically insofar as five wage orders where the IWC previously repealed daily overtime in favor of only 40-hour weekly overtime requirement – the same as federal law under the Fair Labor Standards Act (“FLSA”). The IWC’s new wage orders required payment of overtime based on an employee’s “regular rate of pay” as well.
Simultaneously, and for the first time, the IWC adopted provisions to penalize employees who failed to provide meal and rest periods as its wage orders require. The new wage orders required employers to pay employees one hour “of pay at the employee’s regular rate of compensation” for each workday that the employer did not provide a compliant meal or rest period.
Also during the 1999-2000 session, the Legislature considered multiple bills to enact a meal and rest period penalty provision. Ultimately, the Legislature and Governor approved Assembly Bill 2509 (“AB 2509”) in 2000. The bill’s final version tracked the language and amount used in the IWC’s wage orders. Thus, effective at the start of 2001, AB 2509 enacted new Labor Code Section 226.7(b) requiring that employers “shall pay the employee one additional hour of pay at the employee’s regular rate of compensation” for each workday the employee fails to provide a compliant meal or rest period as required.
Originally, the provision applied if an employer failed “to provide an employee a meal period or rest period in accordance with an applicable order of the” IWC. At the time, AB 60 enacted meal period requirements into California’s statutes for the first time through Labor Code Section 512, while rest periods rules still emanate from the IWC wage orders or other orders. The Legislature later recodified the premium pay provision as part of the current Labor Code Section 226.7(c) and expanded it to cover recovery breaks taken for a cool down period to avoid heat illness. The law currently applies “for each workday that [a] meal or rest or recovery period is not provided,” when an employer fails to provide an employee “a meal or rest or recovery period in accordance with a state law, including, but not limited to an applicable statute or applicable regulation, standard, or order of the Industrial Welfare Commission, the Occupational Safety and Health Standards Board, or the Division of Occupational Safety and Health.
The premium pay provisions largely do not cover overtime-exempt employees. Labor Code Section 226.7(e) provides that they do not apply “to an employee who is exempt from meal or rest or recovery period requirements pursuant to other state laws, including, but not limited to, a statute or regulation, standard, or order of the” IWC. For example, the wage orders exempt executive, administrative, and professional exempt employees from their meal and rest period provisions.
Reflecting a common understanding, the employer in Ferra considered payment of premium pay based only on the employee’s hourly wage. It did not factor in nondiscretionary payments in addition to the hourly wage, such as quarterly incentive payments. The Court of Appeal in Ferra had ruled, 2-1, that the employer complied with the law in doing so. It concluded that paying premium pay based only on an employee’s hourly pay rate satisfied the “regular rate of compensation requirement,” which that court held was different than the “regular rate of pay” required for overtime. The majority of several federal district courts in California to consider the issue reached the same conclusion.
In its unanimous decision in Ferra, however, the California Supreme Court held that “the terms are synonymous: ‘regular rate of compensation’ under Section 226.7(c), like ‘regular rate of pay’ under Section 510(a), encompasses all non-discretionary payments, not just hourly wages.” It acknowledged that the statute and wage orders do not define “regular rate of compensation,” which “may reasonably be construed” either way. Analyzing the history, the Court concluded that the different language carries the same meaning, finding “no evidence that ‘hourly rate of compensation’ means hourly wages only.”
Despite the different wording, the Supreme Court recognized that “regular rate” is a “term of art.” It began by looking at the federal FLSA’s requirement that overtime be based on an employee’s “regular rate,” including remuneration other than just the hourly rate. According to the Court, California’s use of the term “regular rate of pay” for overtime has been understood to have the same meaning.
Looking at the history of Labor Code Section 226.7 specifically, the Supreme Court emphasized the IWC’s simultaneous adoption of wage orders using the term “regular rate of compensation.” It pointed to comments by one commissioner, as well as the IWC’s Statement as to the Basis concerning its 2000 wage orders, describing the “regular rate of pay” for overtime and the “regular rate of compensation” for premium pay as having the same meanings. Going a step further, the Supreme Court determined that the Legislature had the same intention by amending AB 2509 to track the IWC’s language and amount used. Further rejecting the difference in language as carrying a different meaning, the Court asserted that the Legislature has used the terms “pay” and “compensation” interchangeably, with “regular rate” being “the operative term of art.”
Consequently, California employers thus must calculate and pay premium pay for meal and rest period violations in the same manner as with overtime. As the Supreme Court held in Ferra, the regular rate for both types of pay “encompasses not only hourly wages but all nondiscretionary payments for work performed by the employee.”
Importantly, the Supreme Court’s holding in Ferra applies retroactively. The Court rejected the employer’s argument that any interpretation of Labor Code Section 226.7 as synonymous with overtime requirements should apply only prospectively, or going forward from the date of the decision. However, the Court concluded that “[n]o considerations of fairness or public policy warrant such a holding.”
Ferra represents the latest in a series of meal and rest period decisions from the California Supreme Court spawned from Labor Code Section 226.7. Since 2007, among other points, the Supreme Court has ruled that the premium pay represents wages for statute of limitations purposes, held that an action to recover premium pay does not constitute an action for “the nonpayment of wages” for purposes of recovering attorney’s fees, addressed meal and rest period standards and how violations may be proven, and recently held that rounding cannot be used with meal periods.
Pending before the Supreme Court is the question of whether meal and rest period premium pay constitute “wages” for purposes of imposing waiting time penalties under Labor Code Section 203 or recovery of itemized wage statement penalties under Labor Code Section 226. The Court has not yet set a hearing date in Naranjo v. Spectrum Security Services, Inc. There, the lower court – as have other courts – held that such penalties are not recoverable with respect to the alleged failure to pay meal and rest period premium pay.
In addition, regardless of whether waiting time penalties can be recovered, employers may have a sound argument that a bona fide, good faith dispute existed with respect to whether other amounts needed to be included in the premium pay rate before Ferra. The decision contains some language supporting such an argument.
Ferra represents a major decision. It requires the attention of any California employer that pays or is required to pay, meal or rest period premium pay to employees. Employers who do not pay employees any additional pay beyond their hourly pay or equivalent would not have any issue. However, employers who pay additional amounts such as bonuses, incentives, commissions, piece rate pay, or other amounts need to make sure that they pay meal and rest period premium pay at the correct rates.
These issues, and any necessary changes, require immediate attention. The reality is that most – or nearly all – employers in California paid premium pay based on an understanding that paying only the hourly rate or its equivalent was sufficient. Now, with Ferra, California employers have a definitive determination that the regular rate used for California overtime purposes applies instead. In some cases, employers also may need to consider whether to determine and address any back liability within the limitations period.
Regular rate issues can be difficult for employers, including what must be included within the regular rate and how to calculate it. The California Supreme Court has held that, under California law, the regular rate must be calculated differently than under federal law, considering only non-overtime hours instead of the total hours. In addition, just as employers sometimes must recalculate the regular rate later after bonuses or incentives get paid and issue an additional overtime payment, California employers now must face needing to do so with premium pay as well. To navigate all of these issues, California employers should consult their legal counsel.