On July 15, 2021, the California Supreme Court held in Ferra v. Loews Hollywood Hotel, LLC, that premiums for meal and rest period violations must be paid at the employees “regular rate of pay” (the same rate used as the base for calculating overtime pay). This is a direct reversal of the lower court, which held in October 2019 that such premiums could be paid at the employee’s standard hourly rate – without any inclusion of other non-discretionary pay, including incentive pay, commissions, shift differentials, or certain bonuses.
The lead plaintiff was a former bartender at the defendant’s hotel. She brought a wage and hour class action asserting that her employer failed to provide proper meal and rest periods. She argued that, though the employer paid premiums when this occurred, those premiums were improperly calculated because they did not account for quarterly incentive bonuses.
The trial court and Court of Appeal both found that the employer’s payment of such premiums at its employees base hourly rate was sufficient to comply with its legal obligations. As noted above, however, the California Supreme Court disagreed.
As California employers should be aware, they are required to provide most employees with meal periods when they work in excess of 5 hours in a workday and to authorize and permit employees to take rest periods when they work in excess of 3.5 hours in a workday. These duty-free periods must comply with strict rules regarding their number, timing, and uninterrupted nature.
Under Labor Code Section 226.7, if an employer fails to provide an employee a meal period, or to authorize and permit a rest break or recovery period in accordance with state law, the employer must pay the employee one additional hour of pay at the employee’s “regular rate of compensation” for each workday on which the violation occurs.
Labor Code Section 510, on the other hand, requires employers to compensate employees for overtime hours worked at multiples of the employee’s “regular rate of pay.” Courts have long held that this term of art includes not only the employee’s regular hourly wages, but also the hourly value of all of the employee’s non-discretionary earnings.
In this case, the decision came down to whether “regular rate of compensation” (under the premium statute) had the same meaning as “regular rate of pay” (under overtime laws). The California Supreme Court has now conclusively held that it does. This decision was based largely on the principle that California’s employment laws are liberally construed in favor of worker protection.
As with most court decision, the Ferra holding applies retroactively, creating exposure – including for class actions and Private Attorneys General Act (“PAGA”) claims – for employers who applied to prior interpretation.
Employers should contact an experienced employment attorney at Kring & Chung, LLP to ensure their timekeeping and payroll policies align with California law, including implementing proper policies for providing meal and rest periods and for appropriately compensating employees when violations occur. This review will be particularly important for employers who use forms of incentive pay, such as bonuses or commissions.
Kerri N. Polizzi is an Associate of Kring & Chung, LLP. She can be reached at (949) 261-7700.