On July 15, 2021, the California Supreme Court issued a decision in Ferra v. Loews Hollywood Hotel, LLC which was long-awaited but was ultimately highly disappointing to employers.

In sum, the Court held that when employers pay one-hour meal and rest period premiums to employees who report that they were not provided compliant meal or rest periods, the pay is not at the employee’s normal “base” hourly rate but must be at the same FLSA “regular rate” that is used to calculate overtime premiums.  Thus, paying employees meal and rest period premiums at their base hourly wage is no longer acceptable.  Employers must now account for not only base hourly wages, but also other non-discretionary payments for work performed by employees, when determining the rate of pay for meal and rest period premiums, including shift premiums, commissions, incentive payments, and non-discretionary bonuses.  This opinion announced a standard that very few employers have practiced, which likely means that many California employers will need to make significant payroll and policy changes as quickly as practicable.

Background on Meal and Rest Period Premiums

Since 2000, California has had in place a requirement that employers pay one-hour premiums for employees who are not provided compliant meal or rest periods.  Labor Code Section 226.7 states that this payment is measured as “one hour of pay at the employee’s regular rate of compensation.”  “Regular rate of compensation” is not defined by the Labor Code or the Industrial Welfare Commission Wage Orders.  The prevailing practice in the industry—which had been held to be proper by the majority of lower court cases to consider the issue—was that the employer made the payment at the employee’s usual or “base” rate of pay without taking into account other forms of wages.

By contrast, where the same statute that enacted the meal and rest period payments described overtime premiums, it stated they must be paid at 1.5 times the employee’s “regular rate of pay.”  “Regular rate of pay” arises out of the FLSA and requires an employer to add up most of the wages employees receive over a week or pay period and divide by the total hours worked in the pay period.  So, for example, if an employee earned a base of $15 per hour in a 40-hour week, but also earned a $1,000 commission in the same week, the base rate would be $15 but the “regular rate of pay” would be $40 ($1,600 total wages divided by 40 hours).  As this example shows, the difference between the two concepts can sometimes be substantial.

Ferra’s Facts and Procedural History

Ferra was a bartender at Loews.  She was paid hourly wages, in addition to non-discretionary incentive payments.  In 2015, Ferra filed her lawsuit and argued that Loews failed to pay her the “regular rate of compensation” for her non-compliant meal and rest periods because it did not include her incentive payments in its calculation for meal and rest period premiums.  Rather, Loews paid Ferra her base hourly wage for the meal and rest period premiums.

The trial court agreed with Loews that the “regular rate of compensation” for purposes of paying meal and rest period premiums meant the employee’s base hourly wage.  The majority of a three-judge panel of the Court of Appeal also agreed, noting that the “regular rate of compensation” is not synonymous with the “regular rate of pay” used to compensate overtime hours.  The primary basis for the Court of Appeal’s conclusion was that the Legislature made a conscious decision to use two different, specific terms in two different statutory provisions enacted the same year, and thus it must have intended for “regular rate of compensation” and “regular rate of pay” to have different meanings.  Furthermore, the California Supreme Court had previously recognized that, unlike overtime, which is designed to compensate an employee for work performed, the primary purpose of the meal and rest period premiums is to encourage employers to provide meal and rest periods, so the policy reasons for including all types of the pay in the overtime “regular rate of pay” were less salient with regard to meal and rest period payments.

The California Supreme Court’s Decision

On July 15, 2021 the California Supreme Court issued what is likely the final word (in the absence of legislation) on how to interpret the statute.  Employers were disappointed when a unanimous California Supreme Court reversed.  The Court’s primary rationale is a bit simplistic.  The Court noted that the words “pay” and “compensation” are often used interchangeably and “regular rate” is a well-recognized term of art.  Thus, even though there are no examples of the Legislature using the term “regular rate of compensation” to describe the “regular rate of pay,” the language is similar enough that it should be presumed that was its intent.  The Court also pointed to a scattering of comments from the legislative history where individuals referred to the premium as “regular rate of pay.”

The Court essentially waved away the lower court’s invocation of the interpretative doctrine that the legislature’s use of different terms in a statute signifies different meanings.  The Court held that such a doctrine should be flexible and is only one tool among many to interpret a statute.  Finally, the Court fell back on the trump card it always has to rule against employers in wage hour disputes that the wage/hour laws are supposed to be protective of employees, so ambiguities should be construed in favor of “more protection” (i.e., penalizing employers).

Ferra Applies Retroactively

Because this decision announces a rule that the vast majority of employers do not follow and have not followed for the past 20 years, the defendant argued that the newly announced standard should apply only prospectively.  No such luck.  The Supreme Court noted that decisions are presumed to apply retroactively unless they upset a settled legal standard.  Here, although the majority of courts to address this issue had sided with the employers, there was enough uncertainty in the law that the normal rule of retroactivity will apply.  Although Loews argued that retroactive application will expose employers to massive liability, the Court noted it cannot deny employees what they are owed under the law.

Takeaway for Employers

Ferra poses a serious challenge to employers that they should aim to address quickly.  To the extent their payroll systems have built-in ability to make supplemental overtime payments to comply with the overtime regular rate rules, they will want to set them up similarly to apply to meal and rest period premiums.  This may include making “meal period adjustment” payments to accompany the issuance of monthly, quarterly or annual bonuses.  To the extent employers have been on the fence as to whether to institute arbitration to provide protection against class actions, Ferra would provide an additional rationale to do so, since the case is very likely to trigger an immediate and widespread wave of class actions arguing that employers who pay meal and rest period premiums have done so at the wrong rate.