No Break for California Employers: California Supreme Court Deals Blow to Employers on Meal and Rest Break Premiums

On July 15, 2021, the California Supreme Court ruled in Ferra v. Loews Hollywood Hotel, LLC that employers must pay meal and rest period premiums at the “regular rate of pay.” The regular rate of pay, most commonly used to calculate overtime, includes all nondiscretionary compensation paid to nonexempt employees. The Court held that paying meal and rest period premiums at a base hourly or “straight time” rate is inconsistent with the law.

Meal and Rest Period Requirements

Under California law, employers must provide nonexempt employees with duty-free meal and rest breaks. Technical rules govern meal and rest breaks, including their timing and frequency. Missed, late, or interrupted meal or rest breaks can constitute a violation of law.[i]  Per Labor Code section 226.7, a violation triggers an obligation to compensate an employee for 1 hour of pay (“break premiums”).

Previously, California appellate courts determined that employers could legally pay break premiums at an employee’s base hourly rate. The plaintiff in Ferra argued that break premiums should be paid at the regular rate of pay.

The “Regular Rate of Pay”

The “regular rate of pay” is a legal term that is not necessarily equivalent to the employee’s base hourly pay. Generally, it is the weighted average of the employee’s hourly rate(s) of pay and any nondiscretionary compensation. As a result, an employee’s regular rate of pay is often higher than their base hourly rate.

The most common use for the regular rate of pay is to calculate overtime. However, California law requires employers to use the regular rate of pay in other situations, too, such as paying California paid sick leave and reporting time pay.

Employers should now add break premiums to their list of regular rate of pay categories.

Supreme Court Holds Break Premiums Payable at Regular Rate, Including Retroactively

In addition to paying an hourly wage, Loews paid Ferra and other nonexempt employees quarterly nondiscretionary bonuses. Loews did not account for those bonuses when calculating break premiums. Instead, just like the vast majority of California employers, Loews paid break premiums at an employee’s base hourly rate—a practice the company maintained was lawful throughout the case.

The trial court and court of appeal agreed with Loews, but the California Supreme Court sided with Ferra. The Court examined the history of the term “regular rate,” which is derived from the federal Fair Labor Standards Act. The Court also reviewed the legislative history of Labor Code section 226.7 and determined that the Legislature enacted it with the intention that break premiums be calculated in the same manner in which overtime is calculated.

Significantly, the Court denied Loews’ request that this decision apply only going forward. Judicial decisions often apply retroactively, and the Court was unsympathetic to Loews’ arguments, including that the decision will expose employers to significant liability for qualifying underpaid premiums. What’s more, the Court essentially invited such claims to go forward by suggesting that a prospective decision would enable employers “in avoiding ‘millions’ in liability” owed to employees.

Key Takeaways

• Immediately review and update any policies and practices to pay meal and rest break premiums at the regular rate of pay
• Consider proactively auditing meal and rest period premiums paid over the last four (4) years to determine whether any employees who earned nondiscretionary compensation received break premiums at a base hourly rate
• Review all types of compensation paid to nonexempt employees to identify any potential adjustments to the overtime, sick, and meal and rest period premium rates of pay for all forms of nondiscretionary compensation, including payments made on a periodic basis (e.g., nondiscretionary quarterly or annual bonuses, commissions, standby stipends, etc.) Implement other wage and hour best practices to minimize exposure to class and collective actions, including assessing use of arbitration agreements with class and collective action waivers and conducting wage and hour audits

[i] Records reflecting noncompliant meal periods raise a rebuttable presumption of liability for a premium payment. See our prior alert from March 9, 2021 for additional information about that rebuttable presumption.