Updated: November 2, 2021
Under California law, if an employer fails to provide non-exempt employees with a required meal or rest period, they must 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 was not provided. Until the California Supreme Court’s July 15, 2021 decision in Ferra v. Loews Hollywood Hotel, LLC, what constituted an employee’s “regular rate of compensation” was subject to some debate. Now we know for sure: “regular rate of compensation” has the same meaning as “regular rate of pay” (like when we talk about overtime compensation), and it requires employers to factor in nondiscretionary bonuses, incentives, and other payments that are in addition to an employee’s base hourly wage.
Although the Ferra decision is recent, it’s implications are likely retroactive and may impact employee premium pay for up to three years in the past. It is also highly likely that employers will be expected to extrapolate from guidance relating to overtime compensation to determine how exactly they must calculate meal and rest period premiums for more unusual types of compensation.
One of the often-overlooked implications of California’s regular rate of pay rules – and the focus of this advisory – is how it affects nondiscretionary bonuses that are paid at a rate less frequently than every pay period and which cover periods of time greater than a single pay period. For example, when employees who regularly work overtime each week earn a non-discretionary bonus at the end of the year for their productivity over the entire year, employers are required to calculate overtime premium pay on that bonus in addition to the bonus amount itself. This generally makes sense: had a nondiscretionary bonus been paid in the same pay period that the overtime was worked, then it would have been factored into that workweek’s regular rate of pay calculation; so an employer should not be able to avoid this interaction simply because they chose to pay a bonus at a different, less frequent interval.
In essence, when these types of nondiscretionary bonuses are paid, the employer needs to “back-pay” unpaid overtime premium pay at the same time it pays the bonus. How that overtime premium pay is calculated depends, in part, on whether the bonus amount was based on or tied to the employee’s total number of hours worked, effort, and/or productivity. When it is, California’s Department of Labor Standards Enforcement (“DLSE”) recommends that this overtime premium “back pay” be calculated as follows:
(Bonus Amount) ÷ (Total of All “Hours Worked” during the bonus period)* x (0.5) x (Total of all regular overtime hours worked during the bonus period).
For double-time, the (0.5) is doubled to (1.0).
Common examples of these types of bonuses include production bonuses that increase either directly with, or in relation to, total the number of hours an employee works (e.g., the bonus increases with each hour worked, with each customer called, or with each widget made on a production line).
For bonuses not based on or tied to the employee’s total number of hours worked, effort, or productivity, the DLSE recommends that the overtime premium “back pay” be calculated as follows:
(Bonus Amount) ÷ (Straight Time “Hours Worked” during the bonus period)* x (1.5) x (Total of all regular overtime hours worked during the bonus period).
For double-time, the (1.5) is increased to (2.0).
Straight time “hours worked” excludes overtime hours and is generally limited to 8 hours per day, and 40 hours per week at a maximum. Common examples of these types of bonuses include many types of nondiscretionary monthly/quarterly/annual flat-sum bonuses, or attendance bonuses (e.g., fixed amounts for continuing to the end of the season, or working every day of a month, or completing another year of service).
The reason two different calculations exist is tied to both the nature of the bonus and California’s public policy discouraging employers from requiring their employees to work overtime hours. For example, in the context of a flat-sum bonus given to employees for completing another year of serve, that bonus would be earned whether the employee worked 1 or 1000 hours of overtime that year. In such cases, if the overtime premium calculation included those overtime hours into the equation’s denominator, the premium on the bonus would be reduced. In other words, “lowered” overtime premium rates would be owed by requiring the employee to work more overtime, which goes against public policy.
Practice Tip: If you are unsure which calculation to use, California courts have consistently ruled that it is permissible to use the calculation that results in a higher payment of wages to affected employees.
So when employees receive a non-discretionary bonus that spans more than one pay period, which equation do employers use for determining the extra premium pay owed for meal and rest period premium payments? The DLSE has not provided guidance on this issue yet, but employers will likely be expected to extrapolate from guidance relating to overtime compensation.
On a technical level, meal and rest period premium payments are not themselves dependent on the number of hours an employee works; instead, they are dependent on whether the employer complied with the California Labor Code with respect to giving the employee an opportunity for duty-free periods of time during the workday. Further, if meal and rest premium penalty pay owed from a nondiscretionary bonus were based on the total number of all hours worked (including overtime hours), as opposed to just the “straight time” hours worked, that would effectively lower the premium pay. Stated another way, one calculation would encourage the use of overtime hours, while the other would not (again, California public policy generally discourages overtime).
These parallels suggest that the DLSE and Courts would want employers to use a premium pay calculation similar to that used for bonuses not based on or tied to the employee’s total number of hours worked, effort, and productivity (i.e., the second equation listed above). Translating this for use with meal and rest premium premiums, the calculation would read:
(Bonus Amount) ÷ (Straight Time “Hours Worked” during the bonus period) x (Total of all meal and rest period premium penalty hours paid during the bonus period).
This calculation should produce a higher premium pay as compared to the other calculation, which provides additional protection, since employers that choose payment methods that result in greater pay to employees will rarely, if ever, create liability under the California Labor Code (just make sure your wage statements accurately reflect the premium payments you are providing!).
What should employers do now?
- Employers that pay bonuses to their hourly non-exempt employees should determine if those bonuses are nondiscretionary, and then determine whether they are properly calculated into the regular rate of pay for overtime and the regular rate of compensation for meal and rest period premiums.
- For nondiscretionary bonuses that have been excluded from these regular-rate calculations, special care should be given to evaluate whether any back pay may be owed. If back pay may be owed, employers should confer with counsel to identify their options and determine the strategy that makes the most sense in their specific circumstances. In many cases, it will be best to pay the amount owed and extinguish the liability, while in some cases (such as the scenario where non-discretionary bonuses were paid years ago to just a few employees who have now left the company), employers may elect to adopt a different approach.
- Lastly, employers should take time to review any other forms of remuneration (whether monetary or not) paid to their non-exempt employees to ensure everything that must be included in their regular-rate calculations is, in fact, being included.
This is a lot to handle, and we are here to help. If you have any questions about meal periods, the rounding of time records, or any other issue relating to employment law, please contact one of our attorneys: