California Supreme Court Clarifies How to Calculate Premium for Missed Meal Periods and Rest Breaks

On July 15, 2021, the Supreme Court of California issued its ruling in Ferra v. Loews Hollywood Hotel, LLC, holding that an employee’s “regular rate of compensation” for purposes of calculating premium pay for missed meal or rest or recovery periods is synonymous with the employee’s “regular rate of pay” for purposes of calculating overtime wages.

Labor Code § 510, which requires employers to pay overtime wages when employees work more than a certain amount of time, requires that employers calculate an employee’s overtime compensation using a multiple of the employee’s “regular rate of pay.”

Courts have long held that that an employee’s “regular rate of pay” for purposes of calculating overtime wages includes not only the employee’s base hourly rate, but also all nondiscretionary payments – Including payments for an employee’s work that are owed pursuant to a prior contract, agreement or promise and that are not determined at the sole discretion of the employer. Such nondiscretionary payments could include attendance bonuses, production bonuses, and guaranteed incentive payments. Nondiscretionary payments do not include payments like discretionary nonguaranteed holiday gifts that an employer may or may not decide to provide.

Pursuant to Labor Code § 226.7, when an employer fails to provide an employee with a meal period or rest breaks, the employer is required to pay the employee what are commonly referred to as premium wages. Pursuant to Labor Code § 226.7(c), these premium wages consist of “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” (emphasis added). Many employers have interpreted the provisions of Labor Code § 226.7 to require only that an employer pay an employee who has missed a meal or rest or recovery period one (1) additional hour of pay at the employee’s base hourly rate.

At issue in Ferra was whether the “regular rate of pay” for purposes of calculating overtime wages means the same thing as the “regular rate of compensation” for purposes of calculating premium wages. In Ferra, the plaintiff argued that her employer improperly paid her premium wages for missed meal and rest periods by excluding the non-discretionary quarterly bonuses she earned when calculating her “regular rate of compensation.” Based on its analysis of the legislative history of Labor Code §§ 226.7 and 510, the California Supreme Court held that “regular rate of pay” and “regular rate of compensation” are synonymous terms. Thus, employers are required to factor in nondiscretionary payments when determining an employee’s “regular rate of compensation” for purposes of calculating premium wages. Further, the California Supreme Court held that because its ruling interpreted a statute and did not overrule or disapprove of any of its previous decisions, the ruling in Ferra applies retroactively.

The Ferra decision is sure to leave employers and payroll departments throughout California scrambling to verify that their payroll policies are compliant. The attorneys of Freeburg & Granieri, APC are here to help.

For employees, it is important that you are paid all wages owed. If you think you are not being paid all your wages, or if your employer failed to properly pay you premium wages for missed meal or rest or recovery periods, please contact the attorneys at Freeburg & Granieri, APC today.

For employers, now is the perfect time to review your payroll policies and practices. The liability for failing to pay your employees their premium wages using the correct “regular rate of compensation” can have devastating effects on your business. Please contact the attorneys at Freeburg & Granieri, APC today to have your payroll policies and practices reviewed. The attorneys at Freeburg & Granieri, APC can also assist employers in auditing prior premium wage payments to ensure those premium wages have been paid accurately.