On July 15, 2021, the California Supreme Court made it even more difficult for employers to do business in California by issuing a decision that will dramatically increase potential liability for missed meal, rest, and recovery breaks. In Ferra v. Loews Hollywood Hotel, LLC, the Court overturned the rulings of two lower courts in holding that meal, rest, and recovery break premiums must be paid at the “regular rate of pay” and not the base hourly rate. The Court’s opinion can be found here.
The “regular rate of pay” is the basis for overtime compensation under California law. It is often a complex formula that includes all different kinds of remuneration provided for hours worked, such as hourly pay, shift differentials, salary, piecework earnings, commissions, and non-discretionary bonuses. Because the regular rate of pay must include all non-discretionary incentive payments such as bonuses and commissions, it is frequently higher than the base hourly rate.
The Labor Code requires that an employer who fails to provide an employee “a meal or rest or recovery period . . . 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.” In Ferra, the employee argued that the phrase “regular rate of compensation” meant the same as the “regular rate of pay” used in the context of calculating overtime compensation. On the other hand, the employer (and the lower courts) argued that “regular rate of compensation” meant the employee’s base hourly rate (i.e., what the employee would be paid for one hour of work). The California Supreme Court sided with the employee, holding that “regular rate of compensation” in the meal, rest, and recovery premium context has the same meaning as “regular rate of pay” in the overtime context.
The Court also ruled that its decision applies retroactively, not just going forward, thus creating significant exposure for California employers that were trying to comply with the law in good faith by paying premium pay for non-compliant meal, rest, and recovery periods at an employee’s base hourly rate. California employers should expect a new wave of class action and Private Attorney General Act (PAGA) claims based on this decision.
In 2021, the case of Naranjo v. Spectrum Security Services is also scheduled to appear before the California Supreme Court which will address the question of whether an employer’s failure to pay meal and rest break period premiums may result in waiting time penalties, as well as inaccurate wage statement penalties. In light of the Ferra ruling, and the impending Naranjo case, California employers may want to consider taking the following steps to help avoid mounting class and PAGA liability exposure:
- Confirm payroll/human resources personnel have a solid understanding of what the “regular rate of pay” is and how it is determined.
- Update pay systems to pay any meal, rest, or recovery period premium payments in accordance with the applicable regular rate of pay.
- Provide restitution payments to employees who received premium payments in prior periods at the base rate only rather than the regular rate of pay.
- Modify or eliminate incentive compensation programs.
- Adopt a legally compliant meal break waiver program that enables employees to voluntarily waive their first meal break for shifts of 6 hours or less, or their second meal breaks for shifts that are more than 10 hours (but not more than 12 hours) long.
- Implement a verification program through which employees can confirm on a regular basis whether they received opportunities to take legally compliant meal, rest, and recovery breaks.
To learn more about the regular rate of pay and compliant meal, rest, and recovery breaks, please contact Ghazaleh Modarresi at Ghazaleh.Modarresi@berliner.com or one of the attorneys in Berliner Cohen LLP’s Labor and Employment Law Department at 408.286.5800.