On October 9, 2019, the Second Appellate District of the California Court of Appeal issued a decision clarifying the rate of pay at which an employer must pay meal period, rest break, and recovery period premiums. More specifically, the appellate court answered the question: what does the “regular rate of compensation” in Labor Code Section 226.7(c) actually mean? In Ferra v. Loews Hollywood Hotel, LLC, a 2-1 majority of the Court of Appeal affirmed the trial court’s holding that in paying meal period and rest break premiums, the regular rate of compensation is equal to one hour of the employee’s base hourly wage and is not synonymous with the “regular rate of pay” used to calculate overtime payments. This clarification is important to every employer in California.

Pursuant to Labor Code Section 226.7(c), if an employer fails to provide an employee a meal period, rest break, or recovery period in accordance with state law, 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. For years, plaintiff attorneys have been arguing that the regular rate of compensation in Labor Code Section 226.7 really means the regular rate of pay used to calculate an employee’s overtime rate – presumably, because the regular rate of pay will be higher in certain circumstances. Indeed, the regular rate of pay in Labor Code Section 510(a) is an employee’s base rate of compensation plus any adjustments to that rate arising from additional compensation the employee receives, which would include such items as shift differentials, bonuses, and commissions. Thus, unlike an employee’s base hourly rate of compensation, the regular rate of pay may change each pay period. If an employer were required to pay meal period, rest break, and recovery period premiums at the regular rate of pay, it would likely cause an administrative nightmare for payroll departments each pay period. An adjustment would have to be issued with any payment of a monthly, quarterly, or annual bonus because each of those payments would need to be included in the regular rate, and thus would increase the value of the meal or rest period premium. But, thanks to the Ferra court’s thorough analysis of the statutes and the legislative history, employers can rest assured that premium payments are paid at the employee’s base regular rate of compensation.

In rejecting Ferra’s argument that Labor Code Section 226.7’s regular rate of compensation is synonymous with Labor Code Section 510’s regular rate of pay, the Ferra court reasoned that the Legislature made a conscious decision to use two different, specific terms in two different statutory provisions enacted in the same year (and also in two different portions of the wage orders that were revised at the same time). Indeed, had the Legislature intended the terms “compensation” and “pay” to have the same meaning, the Legislature could have simply used the same term. Furthermore, the court looked to legislative history to conclude that equating “regular rate of pay” and “regular rate of compensation” would “elide the difference between requiring an employer to pay overtime, . . . which pays the employee for extra work, and requiring an employer to pay a premium for missed meal and rest hour periods, which compensates an employee for the loss of a benefit. . . . Requiring employers to compensate employees with a full extra hour at their base hourly rate for working through a 30-minute meal period, or for working through a 10-minute rest break, provides a premium that favors the protection of employees.” While the Ferra court agreed with the dissent that the Labor Code should be “construed in favor of protecting employees,” it held that paying employees a full extra hour at their base hourly rate for missing a meal or rest period is sufficient protection.

The Ferra court also unanimously upheld the trial court’s summary judgment order in favor of the employer and its neutral rounding system. This decision is another example of favorable case law holding that even where the net effect of a seemingly evenhanded rounding policy is slightly to reduce the overall compensation of the group of employees subject to the rounding, small statistical differences do not qualify as systematically undercompensating employees as necessary to cause a rounding system to become unlawful. See some of our prior discussion here. Thus, even though Ferra does not establish a bright-line rounding rule, it is a step toward a de facto standard that rounding to the nearest increment (e.g., the nearest tenth or quarter hour) is lawful. In sum, the Ferra court reasoned that neutral rounding contemplates the possibility that in any given time period, some employees will be overcompensated and some will be undercompensated, averaging out in the long run. A rounding policy does not have to overcompensate employees to be fair and neutral, and a system can be fair and neutral even where a small majority is undercompensated.

Going forward, California employers can breathe a small sigh of relief, and pay meal period, rest period, and recovery period premiums at the employee’s base hourly rate, rather than at the more administratively-complex regular rate of pay.  Employers should therefore review their premium payment practices to ensure compliance and should consult with legal counsel concerning best practices for premium payments and time rounding policies.

Co-Authored by Anahit Muradian a Law Clerk in Sheppard Mullins Century City office.