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California Supreme Court Proclaims That Employees Must be Paid for Meal and Rest Break Violations at the Same “Regular Rate of Pay” Used for Calculating Overtime Pay

 

July 22, 2021

On July 15, 2021, the California Supreme Court, in Ferra v. Loews Hollywood Hotel, LLC, issued a disappointing decision for employers when it ruled that the phrase “regular rate of compensation” used for determining the one hour of premium pay owed for meal, rest, or recovery break violations is synonymous with the “regular rate of pay” used to calculate overtime. This means that employers may be underpaying premiums for missed meal, rest, and recovery periods if they are calculating the one hour of premium pay based only on an employee’s base hourly pay rate.The Court inflicted a further blow by holding its decision must be applied retroactively, creating potential liability for past practices.

Both the Ferra trial court and appellate court had ruled in favor of the employer, finding that the phrases were not synonymous. However, the Supreme Court reversed, relying on case law and legislative history reflecting the interchangeable use of the words “compensation” and “pay” in connection with the “regular rate.” The Court further considered the remedial purpose of the meal and rest period premium (to act as a disincentive to the employer to allow noncompliant meal and rest periods) and its duty to adopt the construction that best gives effect to the purpose of the Legislature and IWC—the protection of employees. Thus, the Court applied a liberal construction of the Labor Code and IWC Orders in favor of employees and held “the calculation of premium pay for a noncompliant meal, rest or recovery period, like the calculation of overtime pay, must account for not only hourly wages but also for other nondiscretionary payments for work performed by the employee.”

This means that when a meal, rest, or recovery period violation occurs and a premium is due, the employee’s base hourly rate plus any applicable nondiscretionary payments must be included in a calculation of the employee’s “regular rate” of pay to determine the amount of the premium to be paid. The Ferra decision applies retroactively, meaning that employers who have calculated the meal, rest, or recovery period premium using only the employee’s base hourly rate may have undercompensated employees for pay periods when certain nondiscretionary payments should have been included.

What is a Nondiscretionary Payment?

In Ferra, the Supreme Count explained that “nondiscretionary payments” means “payments for an employee’s work that are owed “pursuant to [a] prior contract, agreement, or promise causing the employee to expect such payments regularly,” and not “determined at the sole discretion of the employer.” The Court gave incentive bonuses and piecework earnings for efficient performance as examples of nondiscretionary pay.The Court also noted that if an incentive bonus is not determined or paid for weeks or even months, the employer must make the proper premium computation and payment as soon as practicable under the circumstances. Other examples of nondiscretionary pay are commissions, attendance or production bonuses, the value of meals and lodging, and other amounts based on hours worked, production, or efficiency.DLSE Enforcement Manual §§ 49.1.1. – 49.1.2.4.In contrast, discretionary payments that do not need to be included in the regular rate of pay would include, for example, sums paid as holiday gifts or as a service award, reporting time pay, the extra hour of pay for failure to provide a meal, rest, or recovery break, overtime premium pay, and split shift pay. See, e.g., Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal. 4th 1094, 1111-14 (likening legally required meal period pay, rest period pay, reporting time pay, and split shift premiums to overtime premiums that are not to be included in computing the regular rate of pay.); DLSE Manual (March 2010) § 49.1.2.4 (9), p. 49-4.

How To Calculate the Meal, Rest, or Recovery Period Premium: Illustrations

The meal, rest, or recovery premium must be based on the employee’s “regular rate of compensation,” and because the Ferra court has determined that this phrase has the same meaning as the “regular rate of pay” used to calculate overtime, if an employer is correctly calculating the regular rate of pay for overtime purposes, then it should be able to use the same regular rate of pay when a meal, rest, or recovery premium is required.The calculation of the regular rate under California law (which differs from federal law in some aspects) can be complicated. Based on Ferra, even when no overtime has been worked, employers must still perform the regular rate calculation if there has been a non-compliant meal, rest, or recovery period that requires payment of a premium.

The calculation of the regular rate is done on a weekly basis (thus the importance of having a defined “workweek”).The regular rate also depends on the nature of any extra nondiscretionary compensation and the time period over which such nondiscretionary pay is earned.

As a simple example, if a non-exempt employee receives a $250 bonus[1] earned over one workweek, then the $250 must be added to the employee’s total compensation for the same period to determine the correct regular rate of pay. But, of course, bonuses may be earned over a week, a quarter, annually, or some other defined period. Thus, it is important that any bonus plan affirmatively describe how and when a bonus is earned, how it is calculated, and when it is payable.  Due to these variables, the regular rate of pay can easily change from pay period to pay period.

To illustrate a basic regular rate calculation for meal period, rest period, or recovery period premiums, assume in week 1, the employee earns $20 per hour, works 40 hours, takes one meal break late, and earns a $250 nondiscretionary bonus.  The missed meal premium will be calculated by dividing the employee’s total compensation for the week by the hours worked as follows:

Week 1:

Base hourly rate of pay = $20
$20 per hour for 40 straight time hours = $800
Bonus attributable to the workweek = $250
Total compensation for the workweek = $1050
Total hours worked during work week = 40
Regular rate of pay = $1050/40 = $26.25 per hour
One hour premium due for missed break (at regular rate) = $26.25 (total compensation divided by total hours)

Assume in week 2, the same employee works 40 hours again, misses one meal period, receives no bonus, but works one of his 8 hour shifts at night and gets a $4 per hour shift differential for the 8 night shift hours.  The missed meal premium will be calculated as follows:

Week 2:

Base hourly rate of pay = $20
$20 per hour for 40 straight time hours = $800
$4 an hour shift premium for 8 hour night shift = $32
Total compensation for the workweek = $832
Total hours worked during work week = 40
Regular rate of pay = $832/40 = $20.80 per hour
One hour premium due for missed break (at regular rate) = $20.80 (total compensation divided by total hours)

Significantly, the above examples illustrate the regular rate for meal, rest, or recovery period premiums. To determine the appropriate rate of pay for overtime premiums is a more complicated calculation and includes not only all applicable non-discretionary compensation, but requires an analysis of the type of compensation involved (i.e., whether a bonus is a flat rate or designed to be an incentive for production may change the calculation).The employer must calculate the regular rate for overtime and any meal, rest, or recovery premium at the time of preparing the employee’s pay for that pay period.However, if an employee earns a bonus over a period of time longer than one pay period (i.e., quarterly or annually) once the bonus is earned, the employer will need to look back over the period the bonus was earned and will likely need to recalculate the regular rate for purposes of paying the correct overtime premium in light of any bonus, as well as for determining the proper amount of a rest or meal period premium.To the extent a rest or meal period premium or overtime premium was already paid, the employer may have to true-up the payment to account for any increase resulting from the earning of a bonus or other nondiscretionary pay.

Although the Court intended the Ferra decision to benefit employees, the case may do a disservice to workers by prompting employers to change or eliminate certain types of compensation provided to non-exempt employees in order to avoid the heightened burdens and risks involved.

Action Items

In the wake of the Ferra decision, California employers should immediately do the following:

1.     Verify that the employer has compliant meal, rest, and, if applicable, recovery period policies and practices and meal period waivers, if used.

2.     Ensure there is a system for paying the meal, rest, and recovery period premium, when appropriate.

3.     Verify that meal, rest, and recovery period premiums (and overtime pay) are being calculated properly.

4.     Verify that the calculation of the regular rate of pay is properly reflected in written policies and actual practices and on pay statements.

5.     Verify that if nondiscretionary pay, such as a bonus or commission, is being earned over a period longer than one pay period, such payments are taken into account when determining meal, rest, and recovery period premiums (and overtime pay).

6.     Put in place a process for updating premium pay when nondiscretionary pay is earned over periods of longer than one pay period, as required.

 

[1] Note that when calculating the regular rate, the type of bonus (production vs. flat rate) may impact the analysis.  For our purposes we are using a flat-rate, nondiscretionary bonus.

 

For further information, contact one of our employment attorneys.

Hope Case
(650) 494-4098
hcase@srclaw.com

Merrili Escue
(858) 381-5458
mescue@srclaw.com

Nancy Kawano
(858) 381-4890
nkawano@srclaw.com