DO YOU HAVE EMPLOYEES? Cal. Supreme Court: New Formula for Calculating Payments for Meal Periods and Rest Breaks

The California Supreme Court just decided a case about the rate of premium pay that employees are owed if their employer fails to provide them a compliant meal period or rest break.  In Ferra v. Loews Hollywood Hotel, LLC, the Supreme Court held that premium payments must not be solely based on the employee’s base hourly rate, but must include the hourly value of any nondiscretionary earnings received during the period at issue, such as nondiscretionary bonuses and commissions.

Existing Law.  Under California law, nonexempt employees are already entitled to one unpaid 30-minute meal period and two 10-minute rest breaks during a typical 8-hour shift.   This applies to employers of all sizes.  Labor Code Section 226.7 already provides that if an employer fails to provide their employee a meal or rest period, then “the employer shall pay the employee one 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.”  Importantly, the new Supreme Court decision does not change that law, but rather, focuses on the meaning of “regular rate of compensation.”

Summary of Facts.  The case involved Jessica Ferra who worked as a bartender for a Loews Hotel in Hollywood from June 2012 to May 2014.  Her compensation included her hourly wage as well as quarterly nondiscretionary incentive payments.  Nondiscretionary payment means that as long as she met the incentive requirement, she would receive the payment from her employer.  With respect to missed meals and rest periods, Loews had been paying her an additional hour of pay based solely on her hourly wage.  Loews did not factor in her nondiscretionary quarterly incentive payments.  Ferra filed a class action lawsuit against Loews in 2015.

Court Decision.  After reviewing a plethora of laws and legislative history, the Supreme Court held that the term “regular rate of compensation … encompasses not only hourly wages but all nondiscretionary payments for work performed by the employee.”  The Supreme Court said that its decision was consistent with state labor laws which “are to be liberally construed in favor of worker protection.”  The Court was also clear that its decision applies retroactively.

Meaning.  The Court’s decision means that if an employee receives an hourly wage plus a nondiscretionary payment incentive, the nondiscretionary payments must be factored in to the determination of “regular rate of compensation” for purposes of compensating them for missed meals or rest periods.  Examples of nondiscretionary payments include: (1) receiving an automatic commission based on revenue that the employee generates, (2) receiving an automatic bonus based on the number of products the employee produces, or (3) receiving an increased hourly rate after hitting a certain number of hours.

Takeaways.   Here are some of the key takeaways from the Ferra decision:

  • The decision does not change whether premium payments are owed to employees when meals or rest periods are missed.  It only clarifies how those payments must be calculated.
  • Employers must update their policies regarding the payment of meal and rest breaks to ensure that they are consistent with this Court decision.
  • Employers may also need to adjust their time-keeping systems to ensure that premium payments are paid in accordance with the Ferra decision, incorporating nondiscretionary payments.
  • Since the decision applies retroactively, employers may want to audit their historic timekeeping records to ensure payments were correctly made (going back about 4 years), or risk receiving claims from employees seeking to enforce payments in accordance with the Supreme Court’s decision.

Please let us know if you have any questions.

Community Legal Advisors Inc.
Michael J. Alti, Esq.