July 16, 2021 California Supreme Court: One Hour California Meal and Rest Period Penalty Must Include Commissions and Non-Discretionary Bonuses

On Thursday, the California Supreme Court issued its decision in Ferra v. Loews Hollywood Hotel, LLC, in which it ruled that the one hour of pay employers are required to provide employees for non-compliance with California’s meal and rest period requirements must be based on the same “regular rate of pay” (RROP) calculation used in calculating overtime pay.  This means that employers must account for commissions and non-discretionary bonuses when calculating the amount of a meal or rest period penalty paid to employees. 

The Court ruled that its decision applies retroactively, so employers may be liable for underpaying hourly employees who received a meal or rest period penalty in a workweek for which they received commissions or non-discretionary payments if the meal/rest period penalty was not based on the RROP calculation.

Details

Jessica Ferra was a bartender at the Loews Hollywood Hotel.  She received quarterly incentive payments.  On occasion, Loews paid her a penalty of one hour of pay for a missed, late or short meal or rest period.  Loews calculated the one-hour meal/rest period penalty at Ferra’s base hourly rate.  Ferra filed a class action against Loews in 2015, alleging that Loews failed to comply with California law by omitting the incentive payments from the one hour premium pay she received for noncompliant meal or rest breaks.  

The governing statute, Labor Code 227.6(c), specifies that “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.”  Ferra argued that “regular rate of compensation” was the same as “regular rate of pay,” which is a well-known concept in wage and hour law used for calculating overtime pay.[1]  Specifically, under the RROP concept, employers must include commissions and other non-discretionary payments when calculating overtime pay for employees.[2]

Both the trial court and the California Court of Appeal ruled in favor of Loews, holding that the because the Legislature did not use the term “regular rate of pay” in the statute, that concept did not apply to the meal/rest period pay.  The Supreme Court, however, disagreed and held that “regular rate of compensation” (the term used in Section 226.7) and “regular rate of pay” were synonymous.  In reaching this conclusion, the Court turned aside Loews’ reliance on accepted “canons” of statutory interpretation, characterizing them as “merely aids” and “guidelines subject to exceptions.”  The Court also relied on the “remedial purpose” of California’s Labor Code and its guidance that California’s labor laws are to be “liberally construed in favor of worker protection.”

Finally, the Court rejected Loews’ argument that its decision should apply only prospectively.  Loews argued that it, like many other employers, had reasonably interpreted Section 227.6 as allowing for the premium pay to be based on an employee’s straight hourly rate and applying the decision retroactively would be unfair.  The Court disagreed, concluding that this was a case of statutory interpretation, and therefore, its ruling should be retroactive.  It also rejected Loews’ pleas that retroactive application of the Court’s decision would expose employers to “millions” in liability, observing it was “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.”

What This Means

Like Loews, many California employers have paid meal/rest period penalties based on employees’ straight time hourly rate.  The Loews decision means that such employers may have liability to employees who received a non-discretionary payment in the same workweek as they received meal/rest period premium pay.  The period of exposure could be up to four years under California’s unfair business practice statute.  Because the incremental difference in the penalties is likely to be small, the total wages owed, even to a large number of employees, may be relatively minor.  However, the liability could expose employers to class action and PAGA claims for attorneys’ fees and other statutory and civil penalties based on an underlying violation of Section 226.7.  We expect to see a proliferation of these claims being filed or added to pending class actions and PAGA lawsuits.

Employers should immediately implement changes to ensure that any meal/rest period penalties paid in the future are calculated based on the employee’s RROP.

In addition, employers may want to analyze options for paying employees to address recalculations of past meal/rest period penalties based on the RROP.  Whether this is a viable option for employers will depend on a number of factors, including the availability of the information needed to identify eligible employees and to calculate the amount owed.  If you have questions about this decision or would like guidance on analyzing your options, please feel free to contact one of the authors or any PPSC attorney.


[1] Calculating the RROP can be complicated.  But, generally for hourly employees, the RROP for a workweek is calculated by determining the total regular pay—including regular wages and other forms of "remuneration"—divided by the total number of hours worked.  For example, an employee with a pay rate of $15 per hour that worked 40 hours, and received a $20 production bonus, would have a $15.50 RROP:

(40 hours x $15/hr) + $20 $620
--------------------------------------  =  -------------  =  $15.50/hr (correct regular rate)
40 hours 40 hours

So, if this employee had a non-compliant meal period in this workweek, under the Loews decision, they should be paid a $15.50 penalty, not a $15.00 penalty.  Where an employee works overtime in the same period that the meal premium is due, the formula would be even more complex.

[2] The term “non-discretionary” for purposes of the RROP rule is defined in state and federal regulations and administrative guidance.  Simply stated, a payment is “discretionary” only if both the fact that the payment is to be made and the amount of the payment are determined at the sole discretion of the employer, and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.


AUTHORS
 
Corrie
Klekowski
Fred
Plevin