On July 15, 2021, the California Supreme Court issued a decision that will increase dramatically California 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” instead of their base hourly rate, as many employers were doing. The regular rate of pay may be higher than the base hourly rate because the regular rate of pay must include all nondiscretionary incentive payments such as bonuses and commissions. Moreover, because the court’s decision applies retroactively, the court created exposure for California employers that acted in good faith trying to comply with the law by paying premium pay at the base hourly rate. California employers should expect a new wave of class action and Private Attorney General Act (PAGA) claims based on this decision.

Background

Jessica Ferra was a bartender for Loews, who earned an hourly wage as well as quarterly nondiscretionary 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. Loews did not factor in nondiscretionary payments (like Ferra’s quarterly incentive payments), which employees may have earned in addition to hourly wages , into the calculation of premium pay owed under section 226.7(c) of the California Labor Code.

Ferra alleged that “Lowes, by omitting nondiscretionary incentive payments from its calculation of premium pay, failed to pay her for noncompliant 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 reversed, 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.

Regular Rate of Pay for Overtime

California law provides that daily overtime rates are multiples of employees’ regular rates of pay. The overtime rate for workers who are paid a guaranteed hourly rate and performance-based incentive bonuses or piecework earnings take those incentive payments to be part of their regular rates—making the overtime pay greater than their base hourly rate. 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 court explained that the reasoning behind application of the regular rate of pay includes the California legislature’s statements that “[t]he eight-hour workday is the mainstay of protection for California’s working people,” “[n]umerous studies have linked long work hours to increased rates of accident and injury,” and “[f]amily life suffers when either or both parents are kept away from home for an extended period of time on a daily basis.” The court also noted that the higher overtime rate serves as a disincentive against requiring employees to work overtime.

Regular Rate of Compensation

California law also requires premium payments for meal, rest, and recovery break violations. “If an employer does not provide an employee with a compliant meal, rest, or recovery period, … section 226.7(c) [of the Labor Code] requires the employer to ‘pay the employee one additional hour of pay at the employee’s regular rate of compensation.’” Loews argued for the application of the canon of statutory interpretation that “a lawmaker is presumed to intend a different meaning when it uses different words in a statutory scheme.” Because the legislature used the term “regular rate of compensation” instead of “regular rate of pay,” many courts concluded that the legislature intended premium payments to be paid at the base hourly rate of pay.

The California Supreme Court disagreed. The court applied a different principle of construction that provides that “where statutes use synonymous words or phrases interchangeably, those words or phrases should be understood to have the same meaning.” The court concluded that the legislature and the courts had used the terms “pay” and “compensation” interchangeably, and thus the court interpreted the legislature’s intent to apply the same meaning to both terms.

The court also identified several policy reasons to apply the regular rate of pay to premium payments, including that “when [employees] are forced to work through break periods, [there are] ‘greater risks of work-related accidents and increased stress,’” and “denials of ‘time free from employer control that is often needed to be able to accomplish important personal tasks.’”

The court also notes that “[w]hen construing the Labor Code and wage orders, [the court] adopt[s] the construction that best gives effect to the purpose” of protecting employees regarding “working conditions, wages, and hours.” Thus, the court “liberally construe[s] the Labor Code and wage orders to favor the protection of employees.”

Retroactive Application

The court concluded the opinion by clarifying that its decision applies retroactively, unpersuaded by the potential exposure such a determination presented to employers:

Loews argues that our decision will have a substantive effect because it will expose employers to “millions” in liability. But Loews cites no evidence that retroactive application of our holding will expose employers to “millions” in liability, and even if Loews were correct, it is not clear why we should favor the interest of employers in avoiding “millions” in liability over the interest of employees in obtaining the “millions” owed to them under the law.

California employers can expect a new deluge of class and collective actions seeking statutory and civil penalties for failing to pay meal, rest, and recovery break premiums at the regular rate of pay.

Key Takeaways

In light of the court’s decision, California employers may want to consider taking the following steps:

Update Premium Pay Systems

Employers may want to update their premium payment systems to pay any meal, rest, or recovery period premium payments in accordance with the applicable regular rate of pay. Because premium payments are often due before earned incentive compensation is final and can be calculated, employers may want to develop a process of retroactively making “true up” payments at the regular rate of pay for break premiums previously paid.

Restitution Payments

Employers may want to provide restitution payments to employees who received premium payments in prior periods at the base rate only rather than the regular rate of pay, may help to avoid the costs of litigation, including statutory and civil penalties, attorneys’ fees, and related costs.

Incentive Compensation Programs

Employers may find it useful to modify or eliminate incentive compensation programs that unreasonably increase the administrative burden of having to make retroactive “true up” calculations for premium payments.

Waiver Programs

Employers may want to adopt a first and second meal break waiver program that enables employees to voluntarily waive their first meal break for shifts of 6 hours or less, and their second meal breaks for shifts that are more than 10 hours (but not more than 12 hours) long,.

Attestation Programs

In light of the state high court’s decision, employers may want to implement an attestation program through which employees can confirm, on a regular basis, whether they received legally compliant opportunities to take timely and duty-free meal, rest, and recovery breaks.

During its current term, the California Supreme Court is also considering another case addressing the question of whether break premiums should be treated as “wages” that must be accurately recorded on wage statements and are susceptible to waiting time penalties if not paid to departing employees on a timely basis. Now, more than ever, California employers may want to closely review their meal, rest, and recovery break policies and practices to help avoid mounting class and PAGA liability exposure.