On July 15, 2021, The California Supreme Court ruled that premium pay for noncompliant meal, rest and recovery periods must be compensated at the employee’s “regular rate of pay,” which must take into account the base hourly rate of pay as well as all other forms of non-discretionary compensation (e.g., non-discretionary bonuses, commissions, shift differentials, etc.) earned during the same pay period. Overtime and sick time pay must be calculated in the same manner. Unfortunately, this has not been the standard practice for most employers, and is contrary to the lower court’s holding in 2019.
Employers may recall the Ferra v. Loews Hollywood Hotel case from our LightGabler annual employment law updates. In that case, an hourly hotel bartender brought a class action against Loews, arguing that the employer improperly calculated missed meal and break premium payments. In 2019, Loews prevailed in the Court of Appeal on the argument that “regular rate of pay” did not include all non-discretionary compensation for the purposes of Labor Code section 226.7 (premium pay), as it did under Labor Code section 510(a) (overtime).
Unfortunately, this win for employers was short-lived. The Supreme Court has now ruled that the term “regular rate of pay” has the same meaning for meal and rest period premium pay as it does for overtime pay, requiring employers with certain compensation models to pay meal and rest period premiums at a higher blended compensation rate. The full Supreme Court decision can be found here.
Making matters worse, the ruling is retroactive (meaning employers face potential past liability for up to four years for missed meal or rest break premium payments there were not calculated with the correct “regular rate of pay"). This decision will have far-reaching impact on California employers, because it creates the potential for increased wage and hour litigation and corresponding damages.
Our “best practice” recommendation has not changed: proactive efforts are key in addressing this compensation burden. Maintaining compliant meal and rest break policies and working with your management team to prevent meal or rest break violations (such as manager and employee training, staffing to avoid meal and rest period violations, starting the meal break well before the end of the 5th hour and conducting workplace audits) are critical to employer protection.
When meal and rest period premiums are due to employees, employers must immediately ensure that their premium pay practices incorporate all non-discretionary compensation to fully compensate employees for missed meal and rest break premium payments at the employee’s “regular rate of pay,” as described above.
Depending upon the employer’s compensation model, the math involved in calculating an employee’s “regular rate of pay” can be complicated. Employers who pay quarterly or annual bonuses, for example, must review the entire bonus period and retroactively recalculate premium payments made during that time. Employers must then make sure they are correctly calculating the gross-up on premium pay, incentive pay, overtime and sick time.
Employers also should consider whether to recalculate the regular rate of pay used to pay premiums paid over the last four years and issue payment to employees for the difference, where necessary. In most cases, the amount due will be a small fraction of the cost of potential litigation. Past and present employees can bring individual claims and class actions for violations going back four years. Even if your employees have signed arbitration agreements with class action waivers, a PAGA representative action would be available and can reach back one year. Although retroactive payment will not prohibit a past or present employee from filing a lawsuit, it will significantly reduce the potential damages and perhaps dissuade an attorney from pursuing the case.
There are several possible approaches to addressing the retroactive liability, properly calculating the required "regular rate of pay" with as little burden as possible, as well as streamlining compensation models to avoid future problems. LightGabler is currently working with our clients on strategies to correct past liability without inviting litigation, as well as to revise compensation models going forward to reduce payroll burdens.
For questions regarding employee compensation or to address other employment law issues, contact the employment attorneys at LightGabler.