California employers are already well acquainted with the resource-intensive process of navigating and applying California law to maintain compliant payroll practices. This process became even more difficult due to the California Supreme Court’s recent decision in Ferra v. Loews Hollywood Hotel, LLC, which holds that premium pay for missed meal and rest breaks must be calculated at the same “regular rate of pay” used to calculate overtime payments.
Of equal concern, the Court held it was not making new law, but simply explaining what the law has always been: in other words, this requirement applies retroactively.
Under California Labor Code section 226.7, non-exempt employees who do not receive a compliant meal or rest period are entitled to receive premium pay of “one additional hour of pay at the employee’s regular rate of compensation for each day that the meal or rest or recovery period is not provided.” A common understanding among employers was that a “premium” was the equivalent of one hour’s pay at the employee’s base hourly rate. While plaintiffs’ attorneys frequently argued that the term “regular rate of compensation” (as used in section 226.7) must be interpreted the same as “regular rate of pay” under section 510(a) for overtime payments, there was no bright line case law. Until now.
Notably, the trial court ruled, and the Court of Appeals agreed, that the “regular rate of compensation” meant an employee’s base hourly rate and was not synonymous with “regular rate of pay” as used for overtime purposes. In reversing the lower court, the California Supreme Court leaned heavily on the legislative history of both Labor Code sections 226.7 and 510 as well as section 7(a) of the federal Fair Labor Standards Act and the California Industrial Welfare Commission’s tracking of the FLSA’s “regular rate” language in California wage orders.
Against this historical background, the California Supreme Court rejected Loews’ interpretation that the term “regular rate of pay” was an established term of art specific to California overtime law — instead finding that because sections 226.7 and 510 were enacted contemporaneously, the terms should be given consistent meaning:
“In sum, we hold that the term ‘regular rate of compensation’ in section 2267(c) has the same meaning as ‘regular rate of pay’ in section 510(a) and encompasses not only hourly wages but all nondiscretionary payments for work performed by the employee. This interpretation of section 226.7(c) comports with the remedial purpose of the Labor Code and wage orders and with our general guidance that the state’s labor laws are to be liberally construed in favor of worker protection.”
For California employers, the Ferra decision means that premium pay for non-compliant meal and rest periods cannot be paid at an employee’s base hourly rate. The calculation for premium pay must be determined by dividing total workweek compensation, including non-discretionary bonuses/payments and commissions, among other potential non-hourly compensation, by total hours worked in that workweek, dividing by two, and then adding that quotient to the base hourly rate.
Moreover, because the Court rejected Loews’ argument that the decision should only apply prospectively, employers could be liable for a failure to pay such premiums at the “regular rate” going back four years (the effective statute of limitations).
In consultation with legal counsel, employers should promptly review their premium pay practices for non-exempt California employees going back four years to ensure compliance with this clarification of existing law.
For more information, please reach out to:
Kirstin Muller – email@example.com or (310) 255-1811
Monte Grix – firstname.lastname@example.org or (415) 835-9016
Margeaux Pelusi – email@example.com or (415) 835-9051