On July 15, 2021, the California Supreme Court issued a decision that has an impact on all California employers and the manner in which meal, rest, and recovery break premiums are calculated. Labor Code Section 226.7(c) provides that meal and rest break premiums must be calculated based on the employee’s “regular rate of compensation.” Many employers have relied upon prior opinions, including the lower appellate court’s opinion (now overruled), and their own interpretation of the statute that “regular rate of compensation” means an employee’s hourly wage rate. By contrast, Labor Code Section 510(a), which pertains to the calculation of overtime wages, uses the phrase “regular rate of pay” in determining the amount of overtime an employee must be paid, and that phrase generally includes all hourly wages plus other non-discretionary payments. Thus, the phrase “regular rate of compensation” has been subject to regular debate: does it mean the same thing as “regular rate of pay,” does it mean the employee’s hourly base rate, or does it include shift premiums, bonuses and other non-discretionary payments?

The California Supreme Court has now put that debate to rest by clearly defining the term “regular rate of compensation” for purposes of calculating meal, rest, and recovery break premiums. In the recent decision of Ferra v. Loews Hollywood Hotel, LLC, the California Supreme Court clarified that for purposes of calculating meal and rest break premiums due under Section 226.7(c), the “regular rate of compensation” is not limited to hourly wages. Ferra was a bartender at the Loews Hotels (“Loews”) who earned both an hourly wage and a quarterly nondiscretionary incentive payment. Loews paid Ferra an additional hour of pay at her normal base hourly rate as a premium for missed meal or rest periods and did not consider her nondiscretionary incentive payments as part of the calculation. Ferra filed a class action lawsuit alleging that Loews failed to pay her for non-compliant meal or rest breaks in accordance with Section 226.7(c) because it did not consider or include nondiscretionary incentive payments in its calculation of premium pay. The California Supreme Court agreed with Ferra, holding that Lowes had not been properly calculating meal and rest break premiums. The Court further held that the Labor Code requires employers to account for hourly wages and all other nondiscretionary payments for work performed by the employee, including shift differential pay, incentive payments, commissions, piece-rate pay, and non-discretionary bonuses as required under Section 510(a). In so holding, the California Supreme Court focused on the fact that the term “regular rate” is the operative term of the phrase, and held that both the Industrial Welfare Commission and California Legislature generally use the terms “pay” and “compensation” interchangeably.

It is important for employers to note that this definition of “regular rate of compensation” and this decision apply retroactively. Therefore, employers should consider the steps they need to take in order to comply with Ferra going forward, and may also need to confirm that prior meal, rest, and recovery break premiums paid by the Employer were compliant with the Labor Code. This may include: (i) review of past and present policies; (ii) potential payments of additional monetary amounts for prior miscalculated premium payments; and/or (iii) making adjustments to payroll systems to ensure that meal, rest, and recovery period premiums are being calculated properly using the employee’s regular rate of compensation. Moreover, employers that pay employees bonuses throughout the year may need to conduct additional calculations to ensure that appropriate meal period premiums have been paid.

In reaching its conclusion that the “regular rate of compensation” in Labor Code Section 226.7(c) has the same meaning as “regular rate of pay” in Labor Code Section 510(a), the California Supreme Court emphasized that its interpretation comports with the “remedial purpose” of the Labor Code and the Wage Orders and with its own general guidance that the “state’s labor laws are to be liberally construed in favor of worker protection.” This new interpretation can have a substantial impact on all employers throughout California.