The Supreme Court of California upends the standard practice of employers paying one hour of additional wages to employees as a penalty for noncompliant meal, rest, and recovery periods in a recent decision.
On July 15, 2021, in the matter of Ferra v. Loews Hollywood Hotel, LLC, the Court held that the additional hour of premium pay owed for noncompliant meal, rest, and recovery periods must be calculated using not only the normal hourly rate of the employee, but must also consider any nondiscretionary payments, such as nondiscretionary bonuses (based on a predetermined formula, safety, or attendance). Apart from being known about and expected by employees, these nondiscretionary payments “are included in the regular rate of pay.”
Under Labor Code Section 226.7(c), “if an employer fails to provide an employee a meal or rest or recovery period in accordance with a state law… the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each workday that the meal or rest or recovery period is not provided.”
In Ferra, the employee brought a lawsuit arguing that the term “regular rate of compensation” in Labor Code section 226.7(c) should be interpreted in the same way the term “regular rate of pay” is interpreted in Section 510(a) which addresses overtime pay.
In terms of overtime as defined in Section 510(a), the regular rate of pay must be computed using both the normal hourly rate of the employee, as well as all nondiscretionary payments. As such, the regular rate of pay can change from pay period to pay period, including adjustments to the straight time rate, reflecting, among other things, shift differentials and the hourly value of any non-hourly compensation that the employee has earned, such as nondiscretionary bonuses.
The Supreme Court held that the “regular rate of compensation” under section 226.7(c), is synonymous with the “regular rate of pay” under section 510(a). Thus, the premium pay for noncompliant meal, rest, and recovery periods must encompass not only the regular hourly rate but also all nondiscretionary payments made within the pay period in which the additional premium pay is due.
Significantly, the Court refused to apply the decision on a prospective basis only. As a result, the requirement to encompass nondiscretionary pay within the calculation of regular rate of pay in the context of meal, rest, and recovery periods is retroactive.
This decision complicates the premium calculation and could result in significant exposure for employers. Employers must immediately revisit their premium pay policies and practices in light of this decision, including potentially correcting past payment calculations.
Employers are encouraged to contact counsel to discuss compliance with the complicated computation of regular rate of pay. If you have any questions about the new requirements please contact Nicholas Roxborough at (818) 992-9999, ext. 222, Drew Pomerance at ext. 212, Michael Adreani, at ext. 234, Marina Vitek, at ext. 236, or Trevor Witt, at ext. 224.