Yesterday the California Supreme Court issued a unanimous decision finding that premium pay for missed meal, rest and recovery breaks must be paid at the employee’s “regular rate of pay”—not just one hour of pay at their “base rate”.  In Ferra v Loews Hollywood Hotel, LLC, the Court concluded the Labor Code requires the calculation of break-related premiums to account for not only hourly wages, but also other nondiscretionary payments such as bonuses, shift differentials and piece rate incentive pay.

For overtime wages, it has been well settled that the “regular rate of pay” is calculated by including nondiscretionary and incentive payments. (See Labor Code Section 510.)  However, Section 226.7(c)’s requirement that “the employer shall pay the employee one additional hour of pay at the employee’s “regular rate of compensation” for missed breaks has universally been interpreted by employers and courts alike to refer to one hour of at the employee’s base rate of pay.  In Ferra v Loews Hollywood Hotel, LLC, the Court was asked to determine if this “canon of statutory construction” was correct, or if the Legislature intended “regular rate of compensation” and “regular rate of pay” to be read as identical terms of art.  The Court held there was no legal distinction between these terms and that they were “synonymous.”

This means, according to the California Supreme Court, the Legislature intended meal, rest and recovery break premiums to be calculated using the regular rate of pay.  Thus, California employers must perform the regular rate of pay calculation to determine the amount of break penalties owed for all missed breaks.  For any employer utilizing “non-discretionary payments,” this will likely require an immediate change in the break premium calculation. 

The Court’s Holding is Retroactive:

The Court acknowledged that its holding violated the “canon of statutory construction” on which employers have relied.  Nonetheless, the Court concluded “[w]e have simply determined how the Legislature intended premium pay to be calculated under section 226.7(c), nothing more.”  In short, the Supreme Court said this is not “new” law; this is what the law has always been, even if no one was aware of it.  

The Court neither acknowledged nor expressed concern about the hardship this ruling will inevitably place on California employers. The Court rejected the employer’s argument that applying this ruling retroactively would lead to a deluge of lawsuits, stating: 

[The employer] cites no evidence that retroactive application of our holding will expose employers to “millions” in liability, and even if [the employer] were correct, it is not clear why we should favor the interest of employers in avoiding “millions” in liability over the interest of employees in obtaining the “millions” owed to them under the law.

Simply put, the Court knows it has changed the rules, knows it has exposed employers to new liabilities, but expressed neither concern nor understanding of the impact its ruling will have on employers in the real world.

Potential Exposure:

In many circumstances, employees can seek unpaid break penalties going back as far as four years from the date a lawsuit is filed.  This means that any employer who has paid meal, rest or recovery break premiums at the base rate of pay in the past four years will have potential liability for unpaid premiums. This also means that any employee claiming they were unlawfully denied any break premiums in the last four years can now claim higher damages.

If you have paid break premiums in the past four years, AND those employees’ regular rate of pay is higher than their base rate of a pay (i.e. their compensation includes nondiscretionary payments in addition to hourly wages), these employees may have a viable wage claim.  In addition to the difference between their base and regular rate of pay, these employees can bring claims for wage statement violations, unpaid wages, PAGA penalties and (for former employees) waiting time penalties.  

The regular rate of pay calculation used to calculate the overtime rate should now be applied to any break premiums. If you are unsure of how to calculate the regular rate of pay, or whether this ruling increases your potential exposure, please seek legal assistance.