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Changes to Wage Premium Payment Practices for Non-compliant Meal and Rest Periods
The California law [California Labor Code §226.7(c)] requires employers to pay non-exempt employees an additional hour of pay at the employee’s regular rate of compensation” for a non-compliant meal and rest periods. Up until now, employers have followed the practice of paying such premiums by utilizing the employees’ standard hourly rates.
The New Ruling
The California Supreme Court has recently clarified its position on the rule that, if an employee misses or takes a late or short meal or rest break, they must be paid an additional hour of not their base hourly rate, but instead their regular rate of pay/compensation.
Hence employers are now required to pay premiums at a higher rate when employees get non-discretionary compensation. Non-discretionary compensation is a bonus that must be paid out if certain criteria are met. It’s a bonus that is announced and established ahead of time.
Examples of non-discretionary bonuses that must be included in the regular rate include:
- Bonuses based on a predetermined formula, such as individual or group production bonuses;
- Bonuses for quality and accuracy of work;
- Bonuses announced to employees to induce them to work more efficiently;
- Attendance bonuses; and
- Safety bonuses (i.e., number of days without safety incidents).
On July 15, 2021, the California Supreme Court in Ferra v. Loews Hollywood Hotel, LLC, held that when an employer is required to pay a meal or rest period premium for failing to give a compliant meal or rest period, that premium must be paid at the “regular rate of pay,” the term that is generally used for overtime purposes, rather than the employee’s base rate of pay.
Facts of the Ferra Case
Jessica Ferra was a bartender in Hollywood. Her employer paid employees an additional hour of pay at their base hourly rate as a premium for a non-compliant meal and rest periods. Ferra was paid hourly and also received quarterly non-discretionary incentive payments, meaning that those incentive payments were due based on the terms of a contract or agreement and her employer had no discretion as to whether or not they were paid. Ferra filed a class action against her employer, alleging among other claims, that it incorrectly paid her by paying employees their base hourly rate as a premium for a non-compliant meal and rest breaks, instead of the Regular Rate, inclusive of the non-discretionary incentive payments. Her employer disagreed, and the trial court sided with the employer, concluding that the “regular rate of compensation” is not synonymous with the “regular rate of pay” for purposes of calculating overtime. A California Court of Appeals affirmed, and the California Supreme Court granted review, ultimately overturning both lower courts.
As a result, the court decided that, if an employee misses or takes a late or short meal or rest break, they must be paid an additional hour of not their base hourly rate, but instead their regular rate of pay/compensation (“Regular Rate”).
The “regular rate of pay” usually includes all nondiscretionary forms of wages, including hourly pay, shift differentials, piece-rate, commissions, and incentive/production bonuses, among other forms.
The decision is final and shall be the authoritative guidance on the rate of pay for premium payments for non-compliant meals, rest, or recovery periods
For example, if an employee earns $15 per hour, works 40 hours per week, and earns a $100 non-discretionary bonus that week, the employer is required to pay the employee an extra hour of pay, including the value of the $100 bonus, for any meal and/or rest break that was not provided to the employee. This premium is calculated by dividing the employee’s total compensation ($15 x 40 + $100 = $700) by the employee’s total hours worked ($700 ÷ 40 = $17.50). Instead of paying the meal and/or rest break premium at the employee’s $15 hourly rate, the employer must pay $17.50 for each meal and rest break not provided.
In accordance with numerous federal rulings, many employers in California have justifiably paid these meal or rest period premiums based on employees’ base rates of pay. The California Supreme Court has now made apparent that such a practice does not abide by the Labor Code.
The “regular rate of pay” may also vary from pay period-to-pay period, depending on what non-discretionary compensation is payable and owing to an employee for any particular pay period.
The ruling in Ferra is retroactive and employers may now face liability for previous practices of paying premiums at the base rate of pay. The employers need to immediately ascertain whether meal and rest break premiums are paid at an employee’s regular rate and have been for the whole statute of limitations period, which is 3 years.
For employers that do not provide any form of compensation beyond an employee’s hourly wages, the Ferra decision should not affect their operations. In those circumstances, the “regular rate of pay” would always be equal to the base rate of pay.
If an employer has been paying premiums based on an employee’s base hourly rate, it is recommended to change this to the regular rate as quickly as possible in order to avoid retroactive violations based on the Ferra decision.