California Supreme Court clarifies that meal and rest break premiums must be paid at regular rate used to calculate overtime

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In an unsurprising decision that is yet another blow to employers, the California Supreme Court clarified in Ferra v. Loews Hollywood Hotel LLC that one-hour premiums for missed or noncompliant meal and rest breaks must be paid at the same regular rate used to calculate overtime. In so deciding, it overturned the Court of Appeal’s decision that had previously held that such premiums could be paid at the employee’s base hourly wage, even if the employee also received additional compensation in the form of bonuses, commissions, or piece rate earnings.

Ferra was a nonexempt bartender at the Loews Hotel who earned a base hourly wage plus a quarterly nondiscretionary bonus. She was paid a 1-hour premium when she occasionally missed her meal breaks, but those payments were paid at her base hourly rate – not including the quarterly bonus. This decision held that the employer should have gone back at the end of the quarter in order to recalculate and supplement these premium payments, to be paid at the “regular rate” similar to overtime, including the bonus.

Given that the premium is essentially a penalty and deterrent for employers to actually provide timely meal and rest breaks, it was understandable that employers differentiated between the requirement under Labor Code section 226.7 to pay 1 hour premiums for noncompliant breaks at the “regular rate of compensation” versus the requirement to pay overtime at a multiple of the “regular rate of pay” as used in Labor Code section 510(a), which is also intended to provide pay for time actually worked. However, the Supreme Court reviewed the legislative history and found that these two phrases were essentially interchangeable because the operative term of art was “regular rate” and that pay and compensation were two ways of saying the same thing. While this is one logical interpretation, the canons of statutory interpretation encouraged employers, and their counsel, to assume that the legislature meant different things when it used different words: regular rate of pay vs. regular rate of compensation. However, the Court held that the important part of that phrase is “regular rate” which was intended to mimic the Fair Labor Standards Act’s term of art, “regular rate,” and includes all nondiscretionary remuneration paid to the employee. The Court reviewed the legislative history and found no evidence that the legislature meant anything different when it instituted the meal break premium requirement using the phrase “regular rate of compensation.”

The Court rejected Loews argument that the same policy rationale does not apply to missed break premiums as overtime since these premium payments are not proportional or related to the time worked. While acknowledging this distinction, the Court emphasized that overtime pay itself is a penalty and deterrent of sorts for employers who require work in excess of the standard 8-hour day. Thus, its intended effect is similar to that of the meal break premium. Even if pay and compensation meant different things, the Court held, there was no reason to believe compensation meant something narrower than pay. The Court shared legislative history and discussions related to the meal break premium that highlighted that the legislature intended for the premium to apply to employees who were paid solely on a piece rate basis. It also provided an illustrative example about how the base hourly wage interpretation would disadvantage the employee and could be used by employers to circumvent some of the intent of the legislature:

Employees A, B, C make chairs and are paid in three (3) wages: Employee A earns $25 an hour. Employee B earns $50 per chair plus the hourly rate for rest breaks required by law with no other nonproductive time during the day, and Employee C earns $20 per hour plus $10 per chair. In one week, if Employee A made $1,000 by working 40 hours, and Employee B earned $1,000 by making 20 chairs they would both be due $25 per hour for their missed meal/rest break premium. However, if Employee C made 20 chairs earning $200, as well as their $20x40 = $800 hourly wages, totaling $1,000 as well, Employee C would only get $20 for every missed meal/rest break premium hour under the Court of Appeal’s interpretation.

The Supreme Court therefore picked the interpretation most favorable to the employee and held that all nondiscretionary compensation must be factored in to the “regular rate” to determine the appropriate rate for the missed or noncompliant meal and rest break premium pay.

Employers should immediately review their pay plans to determine which employees earn additional nondiscretionary compensation (i.e., piece rate or commission pay) and adjust their payroll practices to account for these payments in the meal break premium pay as soon as calculable. This is also a good reminder that even infrequent bonuses (such as Ferra’s quarterly bonus) need to be included in the calculation of overtime owed. Employers who wish to avoid this administrative headache should reconsider the use of such bonuses. Finally, employers should note that employees who receive rest break pay at an enhanced rate, for example under Labor Code section 226.2 for piece rate employees such as technicians, or commissioned salespeople and others paid separately to compensate for nonproductive time including rest breaks such as under the Vaquero v. Stoneledge Furniture LLC decision, must be paid their missed meal and rest break premiums at the regular rate – including these additional payments for break time. The appropriate calculation method for such employees would be to calculate the non- rest break hours paid at the base hourly rate, the rest break hours paid at the enhanced rest break rate, plus commission/bonus/piece rate earnings, and then divide all of this compensation by all hours worked.