CA Supreme Court Changes Rules on Payment of Meal and Rest Break Premiums

Last week, the California Supreme Court issued a decision in Ferra v. Loews Hollywood Hotel addressing what rate needs to be paid for meal and rest period premium payments.

The Loews Decision

California law requires employers to pay premium pay each time a required meal and rest break cannot be provided to an employee. This could be for missed meals or rest breaks, short meal periods (29 minutes), or late meal periods (taken after the first five hours of work). Until recently, the rate for such premium pay was one hour of pay at the employee’s standard hourly rate (straight-time pay). The new Supreme Court decision changes that rate to be one hour of pay at the employee’s “regular rate of pay.”

To understand the regular rate of pay requires a basic understanding of California overtime law. For non-exempt employees, daily and weekly overtime is 1.5 to 2 times the “regular rate of pay.” Calculating the “regular rate of pay” is tricky in California because it requires employers to include different types of payments/compensation made to employees when determining what rate to pay overtime. An employee’s regular rate of pay is not always the same as “time and a half” of the employee’s standard hourly rate. For example, when a non-exempt employee earns certain types of additional compensation during the pay period—such as a nondiscretionary bonus or commission—the additional compensation must be included in the calculation of the employee’s regular rate of pay. In these instances, the regular rate of pay is higher than the standard hourly rate of pay for the employee.

In the Loews decision, the California Supreme Court took up the question of whether meal and rest premium payments should be paid at the standard hourly rate of pay or at the regular rate of pay. California Labor Code section 226.7 requires that employers pay employees “one additional hour of pay at the employee’s regular rate of compensation” as a premium on a workday when an employer has not provided an employee with a compliant meal or rest break. Before Loews, appellate courts had determined that “regular rate of compensation” in section 226.7 was not synonymous with “regular rate of pay” in the overtime provision of the Labor Code. In other words, the prevailing view (before this decision) was that meal and rest premium payments could be paid at a standard rate rather than at the regular rate. In Loews, however, the California Supreme Court determined that meal and rest premium payments must be paid at the regular rate.

What This Means for Employers

Simply put (though this is anything but simple), employers must now pay meal and rest break premiums at the regular rate of pay and not at a standard rate of pay. This means that if you are paying meal and rest break premiums, you may not be calculating those premiums properly. This is particularly true if your employees receive any type of payments in addition to their standard rate of pay. The most common examples of additional payments that affect the regular rate include nondiscretionary bonuses or commissions. Thus, if you make additional payments like bonuses or commissions to employees, you will need to factor these payments into the regular rate calculation to pay the correct meal and rest break premium payments. Failing to do so would be grounds for legal claims related to the failure to pay full and timely wages, which could, in turn, trigger a variety of penalties.

If you only pay standard rates of pay to employees and provide no other compensation of any kind (for instance you only pay standard or minimum wages across the board), then the Loews decision will not change the rate at which you pay premium meal and rest payments. If, however, you pay your nonexempt employees any other form of compensation (including certain bonuses, commissions, other non-health related benefits, etc.), then the Loews decision will require you to incorporate other forms of compensation into the regular rate of pay (which has always been the law) and you may need to pay meal and rest premiums at a higher rate than the employee’s base or standard rate.

What Should You Do Next? 

Calculating an employee’s regular rate in California is tricky and determining what types of compensation and benefits need to be factored into the regular rate is even trickier. Thus, if you (A) pay nonexempt employees premium pay from time to time for noncompliant meal and rest breaks and (B) pay these same employees any compensation/payments other than a standard/base rate, we recommend you talk to an experienced employment lawyer (such as one of our attorneys) to determine the impact of the Loews decision on your meal and rest break premium payments. The decision is considered retroactive, meaning that employers will be potentially liable for past underpayments, even though lower courts previously endorsed an alternative approach.

If you are in active litigation or if you have questions about the potential need to make retroactive payments for underpaid meal and rest break premiums, please reach out so we can discuss these topics in more detail. These are tough questions that will depend on active or potential litigation and the potential exposure associated with prior underpayments.

Because this decision comes on the heels of the even more devastating Donohue decision and further reinforces the importance of meal and rest period compliance, we would encourage you, if you haven’t already, to consider the recommendations we made based on Donohue, which you can access here. This is yet another decision from the California Supreme Court on meal and rest periods that favors employees and creates potential liability for employers.

Finally, if you haven’t already started one, we’d recommend initiating a compliance plan to comprehensively address these and other wage and hour compliance risks. We’ve had the pleasure of working through the compliance plan process with multiple clients this year and we have received very good feedback on the process and the results. To find out more about compliance plans or to start the process, click here.

If you’d like to schedule a call to discuss further, please click here.