The Supreme Court of California recently agreed to review the California Court of Appeal’s decision in Ferra v. Loews Hollywood Hotel, LLC, 40 Cal. App. 5th 1239 (2019), as limited to the following question:

Did the Legislature intend the term “regular rate of compensation” in Labor Code section 226.7, which requires employers to pay a wage premium if they fail to provide a legally compliant meal period or rest break, to have the same meaning and require the same calculations as the term “regular rate of pay” under Labor Code section 510(a), which requires employers to pay a wage premium for each overtime hour?

Though this distinction in words may seem insignificant, its resolution will have great consequences for California employers.

Background

California Labor Code section 226.7 requires an employer that fails to provide an employee with a required meal, rest, or recovery period to pay the employee an 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” (emphasis added). California Labor Code section 510 requires an employer to pay overtime at either one and one-half or twice the employee’s “regular rate of pay” when the employee works more than a specified number of hours in a workday or workweek.

The Supreme Court of California previously clarified that section 510’s “regular rate of pay” calculation includes additional compensation beyond the employee’s straight-time rate of pay, such as split-shift differentials, commissions, and nondiscretionary bonuses; however, California case law had not previously defined the meaning of section 226.7’s “regular rate of compensation” calculation before the Court of Appeal’s decision in Ferra.

The Ferra plaintiff, an hourly employee of Loews Hollywood Hotel, LLC, brought a putative class action alleging, in part, that Loews had improperly calculated meal and rest period premiums required by Labor Code section 226.7. The gravamen of the plaintiff’s argument was that Loews should have calculated the “regular rate of compensation” in the same way employers must calculate the “regular rate of pay” for overtime purposes. In an employer-friendly ruling, the Court of Appeal disagreed.

Specifically, the Court of Appeal clarified that the two phrases have different meanings, and, thus, meal and rest period premiums should not be calculated in the same manner as overtime compensation. In reaching this conclusion, the court reasoned that if the legislature had wanted the terms “compensation” and “pay” to mean the same thing, they would have used the same words: “surely the Legislature meant something different when it used different language in two statutes enacted at the same time,” the court stated. Further, the Court of Appeal’s holding relied on the distinct purposes underlying the overtime and the meal and rest period premium statutes: the former compensates employees for time spent working, while the latter compensates employees for the loss of a benefit.

California Supreme Court to Provide Clarification

Following the Court of Appeal’s decision, the plaintiff appealed to the Supreme Court of California, asking it to clarify what Labor Code section 226.7’s “regular rate of compensation” means “in a context where an employee receives a number of forms of wages for work she performs.” It is difficult to ascertain how the Supreme Court of California will answer, but the dissent lodged by Judge Edmon in the Court of Appeal opinion might provide some insight into the competing arguments.

The dissent relied on three principles to interpret Labor Code section 226.7 in the plaintiff’s favor: (1) California’s labor laws are to be “liberally construed in favor of worker protection”; (2) courts must presume the legislature was aware of judicial construction of existing law and intended the same construction to apply to related laws with identical or substantially similar language; and (3) where statutes use synonymous words or phrases interchangeably, those words and phrases should be understood to have the same meaning.

Addressing the first point, the majority concluded that requiring employers to compensate employees with a full extra hour at their base hourly rate for working through a 30-minute meal period or 10-minute rest break, “provides a premium that favors the protection of employees.” The dissent’s second and third points seem untenable given that the legislature has twice amended section 226.7 without displacing “regular rate of compensation” by “regular rate of pay.” Indeed, it is best left to the legislature to amend statutes; in essence, the plaintiff, in this case, is asking the Supreme Court of California to make the amendments.

Key Takeaways

If the Supreme Court of California accepts the plaintiff’s argument that the terms “regular rate of pay” and “regular rate of compensation” are synonymous, employers paying meal and rest period premiums at the straight-time hourly rate could face substantial liability for past practices, particularly if the court applies its ruling retroactively. Thus, employers following the Court of Appeal’s guidance in Ferra may want to anticipate the issues that could arise as this case develops.