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September 07, 2021
California Supreme Court Rules Break Premiums Based on Regular Rate, Not Hourly Rate

By Cathleen S. Yonahara

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On July 15, 2021, the California Supreme Court rejected the view that premiums for missed meal and rest breaks are paid at the employee’s base hourly rate of pay rather than the “regular rate of pay” used to calculate overtime premiums. Like the calculation of overtime pay, the calculation of premium pay for noncompliant meal and rest periods must account for base hourly wages as well as all other nondiscretionary payments.

Facts

Loews Hollywood Hotel, LLC, employed Jessica Ferra as a bartender from June 2012 to May 2014. It paid her (1) hourly wages and (2) quarterly nondiscretionary incentive payments. When an hourly employee didn’t receive a compliant meal or rest period, Loews paid her premium pay of one additional hour of pay based on the employee’s current hourly wage. The hotel didn’t factor in any nondiscretionary payments, such as Ferra’s quarterly nondiscretionary incentive payments, into the calculation of premium pay.

In 2015, Ferra filed a class action suit against Loews. She alleged its failure to include nondiscretionary incentive payments in its calculation of premium pay violated Labor Code Section 226.7(c), which requires payment of the employee’s “regular rate of compensation.”

The trial court dismissed the case without trial, holding that calculating premium pay according to an employee’s base hourly rate is proper under Section 226.7(c). Siding with Loews, the court concluded the “regular rate of compensation” isn’t the same as the “regular rate of pay” in Section 510(a), which governs overtime pay. Ferra appealed.

The court of appeal affirmed on the same grounds. Justice Lee Smalley Edmon dissented, however, and opined that “regular rate of compensation” has the same meaning as “regular rate of pay” and thus includes nondiscretionary bonuses that are a normal and regular part of an employee’s income. Ferra appealed. The California Supreme Court granted review.

Does Premium Pay Include Nondiscretionary Bonus?

Labor Code Section 226.7(c) states:

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.

California Industrial Welfare Commission (IWC) Wage Order No. 5-2001 similarly says if an employer doesn’t provide a compliant meal or rest period, “the employer shall pay the employee one (1) hour of pay at the employee’s regular rate of compensation for each work day that” the meal or rest period isn’t provided. California courts liberally construe the Labor Code and wage orders to favor the protection of employees.

The question faced by the California Supreme Court is what the legislature meant when it used the phrase “regular rate of compensation” in Section 226.7(c). The term is not defined and may reasonably be construed to mean either hourly wages or hourly wages plus all other nondiscretionary payments. “Nondiscretionary payments” means payments for an employee’s work that are owed under a prior contract, agreement, or promise and are not determined at the sole discretion of the employer.

A critical element of the parties’ dispute was whether the legislature intended the term “regular rate of compensation” in Section 226.7(c) to be synonymous with the term “regular rate of pay” in Section 510(a). For calculating overtime, the term “regular rate of pay” encompasses not only hourly wages but also nondiscretionary payments.

Intersection with Federal Law

Long-standing federal law defines overtime pay in terms of an employee’s regular rate, and state law defines overtime pay in terms of an employee’s regular rate of pay. The “regular rate” for purposes of overtime includes all remuneration for employment paid to or on behalf of the employee. That includes all nondiscretionary payments (such as nondiscretionary bonuses) in addition to the base hourly rates.

Historically, California’s wage orders used the term “regular rate of pay” (instead of “regular rate”) as the basis for calculating overtime. Nevertheless, California courts have interpreted “regular rate of pay” in the wage orders to be synonymous with “regular rate” in the federal Fair Labor Standards Act (FLSA).

The California Division of Labor Standards Enforcement (DLSE) has consistently found that in determining which payments are to be included in or excluded from the calculation of the regular rate of pay, California will adhere to the standards adopted by the U.S. Department of Labor (DOL) to the extent they are consistent with California law. The DLSE Enforcement Policies and Interpretations Manual states: “Since the Industrial Welfare Commission has not defined the term ‘regular rate of pay,’ DLSE has determined that the IWC intended to adopt the definition of ‘regular rate of pay’ set out in the Fair Labor Standards Act.”

In 1999, the California Legislature enacted Assembly Bill (AB) 60, known as the Eight-Hour-Day Restoration and Workplace Flexibility Act. The bill amended Labor Code Section 510(a) to provide that any work in excess of eight hours in one workday must be compensated at the rate of no less than one and one-half times the employee’s regular rate of pay. AB 60 also directed the IWC to rewrite its wage orders to restore daily overtime pay.

On June 30, 2020, the IWC adopted the updated Wage Order No. 5, effective October 1, 2000, which included overtime provisions that mirrored the language of Section 510(a). At the same time, the IWC added the following new provision requiring premium pay for meal or rest break violations: “The employer shall pay the employee one (1) hour of pay at the employee’s regular rate of compensation” for each workday a compliant meal or rest period isn’t provided.

The IWC explained its rationale for adding that premium pay provision. In reviewing its wage orders for purposes of complying with AB 60, “the IWC heard testimony and received correspondence regarding the lack of employer compliance with the meal and rest period requirements of its wage orders. The IWC therefore added a provision to this section that requires an employer to pay an employee one additional hour of pay at the employee’s regular rate of pay for each work day that a meal period is not provided” (italics added).

The IWC also “added a provision . . . that requires an employer to pay an employee one additional hour of pay at the employee’s regular rate of pay for each work day that a rest period is not provided” (italics added). The California Supreme Court observed that as the italicized phrases indicate, the IWC used the term “regular rate of pay” interchangeably with the wage order’s term “regular rate of compensation.”

Two months after the IWC adopted the updated Wage Order No. 5, pending AB 2509 was amended to provide that “the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each work day that the meal or rest period is not provided.” The amended version was enacted into law.

Court’s Decision

Given the legislative history and the fact the IWC used the term “regular rate of pay” and “regular rate of compensation” interchangeably, the California Supreme Court held the premium pay for a noncompliant meal, rest, or recovery period must include not only hourly wages but also other nondiscretionary payments for work performed by the employee.

Loews argued the court shouldn’t apply the decision retroactively because employers reasonably interpreted the “regular rate of compensation” to mean the hourly rate, and applying the decision retroactively could expose employers to “millions” in liability. The court rejected that argument because judicial decisions generally apply retroactively, and it further stated, “It is not clear why we should favor the interest of employers in avoiding ‘millions’ in liability over the interest of employees in obtaining the ‘millions’ owed to them under the law.” Ferra v. Loews Hollywood Hotel, LLC (California Supreme Court, 7/15/21).

Bottom Line

You should promptly review your policies and practices to ensure the premium pay for missed meal and rest breaks is calculated based on the employee’s “regular rate of pay.” That includes not only the base hourly pay but also all other nondiscretionary payments (e.g., shift differentials, bonuses, and commissions).

Cathleen S. Yonahara is a partner at Freeland Cooper & Foreman LLP in San Francisco. Cathleen has successfully represented employers in courts and before various government agencies and provides advice and counseling to employers on all aspects of the employment relationship in order to avoid potential legal disputes. She may be contacted at yonahara@freelandlaw.com.

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