On July 15, 2021, the Supreme Court of California dealt another blow to California employers. In Ferra v. Loews Hollywood Hotel, LLC, the Supreme Court answered the question of whether the Legislature intended “regular rate of compensation” under California Labor Code § 226.7(c) to have the same meaning as “regular rate of pay” under § 510(a), such that the calculation of 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 nondiscretionary payments for work performed by the employee.
In its 29-page opinion, the Supreme Court unanimously determined that premium payments for noncompliant meal breaks, rest breaks, and recovery periods must be paid at the employee’s regular rate of pay, instead of the employee’s base hourly rate.
Jessica Ferra worked as a bartender for Loews Hollywood Hotel, LLC (“Loews”) from June 16, 2012, to May 12, 2014. Ferra was paid an hourly wage as well as quarterly nondiscretionary incentive payments. If an hourly employee was not provided with a compliant meal or rest period, Loews paid the employee an additional hour of pay according to the employee’s base hourly wage at the time the meal or rest period was not provided. If the employee earned any nondiscretionary payments in addition to an hourly wage, like Ferra’s quarterly incentive payments, Loews did not factor these payments into the calculation of premium pay owed under Section 226.7(c).
In 2015, Ferra filed a class action suit against Loews. Ferra alleged Loews, by omitting nondiscretionary incentive payments from its calculation of premium pay, failed to pay her for noncompliant meal or rest breaks in accordance with her “regular rate of compensation” as required by Section 226.7(c). The trial court granted summary judgment to Loews, and the Court of Appeal affirmed, holding that “regular rate of compensation” in Section 226.7(c) and “regular rate of pay” in Section 510(a) are not synonymous, and the premium for missed meal and rest periods is the employee’s base hourly wage.” Ferra appealed to the Supreme Court.
The Supreme Court’s Decision
The Supreme Court reversed, and concluded that premium payments for break violations must be paid at the higher “regular rate of pay,” which must include a calculation of incentive compensation for commissions, bonuses, and other non-discretionary in its rate.
After reviewing both federal and state legislative history, related wage and hour laws, California Wage Orders, and a plethora of court opinions stretching back more than 80 years, the Supreme Court reaffirmed that the California Labor Code is to be interpreted in favor of employees. Citing its holding in Alvarado v. Dart Container Corp. of California, the Supreme Court held that because its reading of “regular rate of compensation” in Labor Code Section 226.7(c) is “[o]ne very reasonable way to construe” the phrase, Loews “is simply wrong when it argues that ordinary people could not have predicted plaintiff's interpretation, and that it would violate defendant’s due process rights to adopt that interpretation.”
To illustrate its point, the Supreme Court provided an example involving three employees, A, B, and C, who each work for a chair manufacturer with a different compensation scheme. Employee A is paid a straight hourly rate of $25 per hour. Employee B is paid $50 per chair, plus the hourly rate for meal and rest periods required by law. Employee C is paid $20 per hour, plus $10 per chair. Suppose further that, in a five-day workweek, each employee makes 20 chairs by working eight hours a day (i.e., no overtime). In one week, Employee A earns $1,000 ($25 per hour multiplied by 40 hours), as do Employee B ($50 per chair multiplied by 20 chairs) and Employee C ($20 per hour multiplied by 40 hours, plus $10 per chair multiplied by 20 chairs). The hourly pay for each employee is $25 per hour ($1,000 divided by 40 hours). There is no dispute that $25 per hour is the “regular rate of compensation” for purposes of calculating meal or rest break premium pay for Employees A and B. However, under Loews’s position, the “regular rate of compensation” for Employee C is only the base hourly rate of $20 per hour.
The Supreme Court found that there was no reason why the Legislature or Industrial Welfare Commission would have singled out workers like Employee C, who receive both hourly wages and other nondiscretionary payments, for such disadvantage instead of requiring premium pay in accordance with the total nondiscretionary payments earned by each employee.
In supporting its conclusion, the Supreme Court held the terms “regular rate of compensation” under Labor Code § 226.7(c) and “regular rate of pay” under Labor Code § 510(a) are synonymous. The Supreme Court also held that the calculation of 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 nondiscretionary payments for work performed by the employee.
The nail in the proverbial coffin for employers in Ferra was the Court’s determination that its decision applies retroactively. Although Loews argued that retroactive application would expose California employers to “millions” in liability, the Court was not persuaded, and saw no reason why employees should be deprived of “millions.” To justify its holding, the Court held that it simply determined how the Legislature intended premium pay to be calculated under Section 226.7(c), nothing more.
This decision likely has a significant financial impact on employers who regularly pay their employees commissions, bonuses, and other non-discretionary pay and who also regularly pay premium payments to their employees for noncompliant meal or rest breaks, or recovery periods.
What should employers do?
- Don’t panic! While the Supreme Court’s decision in Ferra seems financially crippling for employers, the decision does not change whether the premium payments are owed in the first place. Rather, the Ferra decision simply clarifies how those premium payments must be calculated.
- Employers should audit their timekeeping records for meal break, rest break, and recovery period premium payments made during the applicable statute of limitations, which can be up to four years, to ensure the premiums were paid in line with Ferra¸ or accept the risk and potential liability that will go along with failing to do so.
- Employers must update their policies regarding the payment of meal break, rest break, and recovery period premium payments to ensure that the language of their policies are consistent with the Supreme Court’s holding in Ferra.
- Employers should take this opportunity to reinforce the Company’s meal break, rest break, and recovery period policies with its human resources department, its managers, and its employees.
- Employers who have time keeping systems that apply an automatic premium payment to employee’s who do not take a compliant meal break, rest break, and recovery period must adjust their automatic premium payment so that premium payments are paid at the employee’s regular rate of pay.
- Evaluate ongoing litigation. For employers with active class actions, a plaintiff must be able to prove they earned commissions, bonuses, or other non-discretionary payments, which impacted their regular rate of pay. This can sometimes be a highly fact-dependent inquiry that must be made on an individualized basis, which presents a defense to class certification.
If you have questions about calculating premium payments for noncompliant meal breaks, rest breaks, or recovery periods, or about paying your employees restitution for premium payments in previous pay periods, or if you have questions on any other issues relating to employment law, please contact one of our attorneys.