Issuing the California Supreme Court’s decision in a much-anticipated case, Justice Liu on behalf of a unanimous court explained in Ferra v. Loews Hollywood Hotel, LLC that “[t]he calculation of premium pay for a non-compliant meal, rest, or recovery period, like the calculation of overtime pay, must account for not only hourly wages but also other nondiscretionary payments for work performed by the employee.” Practically speaking, this means that whenever an employer pays a California employee a non-discretionary bonus or other amount, it must recalculate any meal or rest break premiums also paid to the employee in that pay.

California Labor Code §226.7(c) requires an employer to “pay the employee one additional hour of pay at the employee’s regular rate of compensation” for non-compliant meal and rest breaks, whereas Labor Code §510(a) requires an employer to compensate an employee by a multiple of the employee’s “regular rate of pay” for overtime. The decisive holding in Ferra was that the terms “compensation” and “pay” are synonymous, and that the regular rate of either encompasses all non-discretionary payments, not just hourly wages. As a result, 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”).

In California, calculating the Regular Rate generally requires that all payments an employee received over the course of the week be divided by the total number of hours worked. But, consistent with all things California employment law-related, there are certain exclusions and exceptions. Although this blog isn’t meant to go into the nuances of the Regular Rate calculation, it suffices to say that calculating Regular Rate quickly gets very complex if different types of incentive pay is received by an employee, including whether it is discretionary or non-discretionary, a flat-sum, productive, or piece-rate bonus, and/or an employee earns different rates for certain work or premiums for work performed at certain times (e.g., weekends or nights).

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 non-compliant meal and rest periods. Ferra was paid hourly and also received quarterly nondiscretionary 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 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 “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.

In determining whether “regular rate of compensation” and “regular rate of pay” were meant to be synonymous by the Legislature, the California Supreme Court analyzed various “canons of interpretation” used to interpret statutory language. The court found that the operative term is “regular rate”, and whether it is followed by “pay” or “compensation” doesn’t change the meaning. The court rejected the employer’s argument that because the Industrial Wage Commission and Legislature used different terms (“pay” and “compensation”), a different definition was intended, explaining that there was no history or support for such a contradictory interpretation, particularly because the terms were used interchangeably in legislative sessions, court decisions, and by the Industrial Wage Commission.

Significantly, the Ferra decision applies retroactively, which means employers need to quickly determine whether meal and rest break premiums are paid at an employee’s Regular Rate, and have been for the entire statute of limitations period, which is three years. If an employer finds that it has been paying premiums based on an employee’s base hourly rate, it’s recommended to change this to the Regular Rate as quickly as possible and consult with counsel to discuss and determine a strategy to reduce litigation exposure for retroactive violations based on the Ferra decision.