On July 15, 2021, the California Supreme Court settled a longstanding question in Ferra v. Loews Hollywood Hotel, LLC, 2021 WL 2965438, about how an employer must calculate the extra hour of premium pay that California non-exempt employees are owed if a compliant meal or rest break is not provided.
In a significant reversal of prior court rulings, the Court determined that meal and rest period premium payments are based on an employee’s “regular rate of pay,” meaning that such premiums must include the value of all nondiscretionary payments (such as nondiscretionary bonuses and sales incentive payments), and are not paid at an employee’s base hourly rate. In other words, the Ferra ruling concludes that the method for calculating meal and rest period premium payments is the same as calculating overtime payments pursuant to California law.
Following the Ferra decision, employers who do not include the value of all nondiscretionary payments in their calculation of meal and rest period premium payments should swiftly revisit their practices.
The Ferra Ruling
California law has long established that non-exempt employees who accrue overtime must be compensated at their “regular rate of pay” – which not only includes their base hourly rate, but also all other forms of compensation such as nondiscretionary bonuses, commissions, and piecework earnings. See Labor Code § 510(a).
Unlike the overtime statute, however, the California provision pertaining to missed meal and rest break payments fails to specify whether the “regular rate of pay” calculation or simply an employees’ hourly rate applies to such payments. Rather, it states that “the employer shall pay the employee one additional hour at the employee’s regular rate of compensation for each workday that the meal or rest . . . period is not provided.” See Labor Code § 226.7 (italics added).
In Ferra, a hotel bartender filed a class action against her employer for allegedly underpaying penalties for missed meal or rest periods under the statute in question. The California Supreme Court considered the following issue: “Did the Legislature intend the term ‘regular rate of compensation’ in Labor Code section 226.7, which requires employers to pay a wage premium if they fail to provide a legally compliant meal period or rest break, to have the same meaning and require the same calculations as the term ‘regular rate of pay’ under Labor Code section 510(a), which requires employers to pay a wage premium for each overtime hour?” 2021 WL 2965438 at *3.
The California Court of Appeal and several federal district courts previously answered this question in the negative, relying on the statutory interpretation principle that “where different words or phrases are used in the same connection in different parts of a statute, it is presumed that the Legislature intended a different meaning.” Id.
The California Supreme Court unanimously reversed. It held that “the words ‘compensation’ and ‘pay’ appear interchangeably in legislative and judicial usage,” and that it “find[s] no indication that the Legislature intended ‘regular rate of pay’ in Section 510(a) and ‘regular rate of compensation’ in Section 226.7(c) to have different meanings.” Id. On that basis, “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 other non-discretionary payments for work performed by the employee.” Id. at *1 (italics added).
The California Supreme Court further held that its decision applies retroactively.
Ferra’s Impact on Employers
Employers should review (and if necessary, update) how they are calculating meal or rest period premium payments for non-exempt employees based in California to ensure that such payments include the value of any nondiscretionary earnings during the relevant pay period.
The following are examples of how meal and rest period premium payments should be calculated to comport with the California Supreme Court’s ruling in Ferra:
Example #1: For California non-exempt employees earning hourly wages, the “regular rate of pay” is the same as the hourly rate. If an employee is paid $15.00 per hour, then her “regular rate of pay” is $15.00 per hour and her overtime rate is $22.50 ($15.00 x 1.5). She would be entitled to an additional hour of premium pay at $15.00 if her employer failed to provide a compliant meal or rest break.
Example #2: For California non-exempt employees earning a combination of hourly wages and nondiscretionary earnings, the “regular rate of pay” is calculated by dividing the total amount of earnings for a given week (including earnings during overtime hours) by the total number of hours worked in the workweek (including overtime hours).
For example, if a non-exempt salesperson worked 45 hours in a workweek at an hourly rate of $15.00, and also earned a $200 sales commission during that pay period, then the “regular rate of pay” would be calculated as follows:
Total amount of earnings = (40 hours x $15.00) + (5 hours x $15.00) + $200 = $875.00
Total number of hours worked in workweek = 45 hours
Regular rate of pay = $875.00 ÷ 45 hours = $19.44
The employer would therefore owe the salesperson a $19.44 premium for each noncompliant meal or rest break during the pay period.
Given that Ferra applies retroactively, employers who provide nondiscretionary bonuses or other remunerations to their non-exempt employees are encouraged to audit their prior meal and rest period premium payments to ensure that the value of nondiscretionary earnings are included in their “regular rate of pay” calculations.
Example #3: For California non-exempt employees paid on a salary basis, the “regular rate of pay” is determined by dividing their weekly salary by 40 hours. For example, if a non-exempt employee’s weekly salary is $1,000 per week, his “regular rate of pay” is $25.00 per hour. He would be entitled to a premium payment of $25.00 if his employer did not provide a compliance meal or rest period.