In a bold move that affects most California employers, on July 15, 2021, the California Supreme Court issued a decision that will dramatically increase employers’ potential liability for missed meal, rest, and recovery breaks. In Ferra v. Loews Hollywood Hotel, LLC, the court unanimously held that employers must pay premium payments to employees for missed meal, rest, and recovery breaks at the employee’s “regular rate of pay,” rather than by using the "base hourly rate calculations" put in practice by most companies. As a result, the "regular rate of pay" may be higher than the base hourly rate because the regular rate of pay must include all non-discretionary incentive payments, such as bonuses and commissions.
Strikingly, because the Court’s decision applies retroactively, the Supreme Court now created additional exposure for California employers that previously acted in good faith by paying premium pay at the base hourly rate. Unfortunately, California employers should expect a new wave of class action and Private Attorney General Act (PAGA) claims based on this Court decision seeking statutory and civil penalties. Read below for ways to limit your liability.
What Was the Ferra Case About?
As a bartender for the Lowes Hotel, Jessica Ferra earned an hourly wage, in addition to quarterly non-discretionary incentive payments. According to Loews’s meal and rest break policy, hourly employees who are not provided with a compliant meal or rest period are entitled to an additional hour of pay according to their base hourly wage at the time the meal or rest period was not provided. However, Loews did not factor in the non-discretionary payments (like Ferra’s quarterly incentive payments), into the calculation of premium pay owed under section 226.7(c) of the California Labor Code.
Ferra alleged that “Lowes, by omitting non-discretionary incentive payments from its calculation of premium pay, failed to pay her for non-compliant meal or rest breaks in accordance with her ‘regular rate of compensation’ as required by section 226.7(c).” The trial court ruled in favor of Loews, and the appellate court affirmed. The California Supreme Court recently reversed this opinion, concluding that premiums paid for break violations must be at the higher “regular rate of pay,” which must include a calculation of incentive compensation in its rate.
Who Does This Affect?
Employers who do not already pay employees any additional pay beyond their hourly pay or equivalent (only earning an hourly wage), would not have any issue. However, employers who pay additional amounts such as bonuses, incentives, commissions, piece rate pay, or other amounts need to make sure that they pay meal and rest period premium pay at the correct rates. In some cases, employers also may need to consider whether to determine and address any back liability within the limitations period.
If you have been using the Fair Labor Standards Act (FLSA) method for calculating overtime pay, or you have any history of providing non-discretionary pay (sales bonus, attendance bonus, or other promised bonuses), you could be at risk for claims of unpaid wages, penalties, and more from previous or current employees.
A Brief History
In the two decades since the law was first passed in 2001, there has been uncertainty about calculating Meal/Rest premiums based on "hourly wage rate" or "regular rate of pay," which includes non-discretionary pay in the calculations of overtime. In 2019, Ferra v. Loews Hollywood Hotel, LLC determined the use of hourly wage rate to calculate premiums, and it was affirmed by the Court of Appeals. Thus, employers believed a new precedent was set. However, the California Supreme Court reversed the decision after an in depth analysis of the "regular rate of compensation" written in Labor Code Section 226.7. The inclusion of non-discretionary pay in Meal/Rest premiums confirms the calculation standards set by Alvarado v. Dart Container Corp. of California, which uses the California Department of Labor Standards Enforcement formula to determine overtime pay.
Non-exempt employees are owed premium payments by employers who fail to provide proper meal and rest periods on the next paycheck. As this ruling is retroactive, all employers who have any history of non-discretionary pay should audit their payroll records from the past two decades. Additionally, it is important to note that the Labor Code section 226.7 also requires "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.” As the meal period and rest or recovery period violations are considered separate, employees may be eligible for up to two hours of additional pay at the regular rate of compensation for each day in question. This pay must be included in addition to the proper calculation of overtime pay due to the employee.
Practice Pointer: How to Calculate Meal/Rest Premiums
Determination of the regular rate of pay must include any non-discretionary pay (sales bonus, attendance bonus, promised bonus, etc.) from the pay period, and must be divided by total non-overtime hours in the same pay period.
For example: Stella makes $25.00 per hour. She worked 45 hours in the week, and also received a $10.00 sales bonus each day for meeting her daily sales quota.
To calculate her regular rate of pay for this pay period, we start by multiplying Stella’s hourly rate by total hours worked ($25.00 x 45 hours = $1,125.00).
Then, we add the total amount of non-discretionary bonus provided during the pay period ($1,125.00 +($10.00 bonus x5 days)=$1,175.00.
The sum is then divided by the total number of hours worked ($1,175.00 /45 hours = $26.11).
Stella's regular rate of pay is determined to be $26.11 for this pay period.
An employee is thus entitled to one and one-half times his or her regular rate of pay for time worked in excess of 8 hours in one day, and double his or her regular rate of pay for time worked more than 12 hours in one day. The overtime pay can be determined by multiplying the regular rate of pay by 0.5 ($26.11 x 0.5 = $13.06), and then multiplying that rate by the number of overtime hours ($13.06 x 5 hours = $65.30). This total is then added to the amount earned during this pay period ($1,175.00+ $65.30 = $1,240.30).
If Stella's employer failed to provide proper meal periods during this time, but had adequately provided rest periods, the employer would pay an additional one hour of regular rate of pay as penalty for each day of the violation. In this case, if the meal periods were not provided Monday-Friday throughout the workweek, the employer must add the regular rate of pay multiplied by the number of days of the violation ($26.11 x 5 = $130.55) to the total owed to the employee ($130.55 + $1,240.30 = $1,370.85). If Stella was denied both a meal and rest period, the penalty would be double ($261.10 + $1,240.30 =$1,501.40).
What Can Employer Do Now?
An employer should speak with its CPA or payroll company to make sure that procedures are established for properly calculating "regular rate of pay" on all paychecks moving forward.
Have employees sign a Meal and rest Break Acknowledgment so that they know they are entitled to meal and rest breaks (depending on the number of hours they work), so they are aware and take their scheduled meals and rest breaks.
If it's mandatory to have an non-exempt employee work through his or her meal and/or rest break, record this immediately, have the employee sign a Meal Waiver for each period missed, and provide the appropriate penalty in the next paycheck based on the calculations discussed in this article.
Have your Managers review employees' time sheets daily, and ensure that employees are taking the meal and rest breaks to which they are entitled.
Audit past payroll records and consider making restitution payments for any back wages owed to mitigate litigation liability.
Consider modifying or eliminating incentive programs that would require additional calculations to determine the "regular rate of pay" in order to simplify your calculations.
Limit the amount of overtime that non-exempt employees take by requiring manager approval before working overtime.
Use electronic time clocks that accurately record when employees take their breaks.
Eliminate manual self-reporting time keeping--remember, the burden is on the employer to demonstrate that the employees are taking their meal and rest breaks in the intervals required by the Wage Orders and Labor Code. See the Department of Industrial Relations website for more meal and rest break FAQs.
If you have any questions about auditing your payroll records, calculating Meal/Rest premiums, drafting a Meal and Rest Break Acknowledgement, updating your Employee Handbook, training your managers, creating a Meal Break Waiver, or updating your employee documents to reflect the recent updates, we encourage you to contact our office at email@example.com, or call us at (949) 798-6298.
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This article is for informational purposes only, and does not constitute legal advice or create an attorney-client relationship. This article does not make any guarantees as to the outcome of a particular matter, as each matter has its own set of circumstances and must be evaluated individually by a licensed attorney.