On July 15, 2021, the California Supreme Court decided a closely watched case, Ferra v. Loews Hollywood Hotel, LLC, and unanimously held that employers are required to pay meal and rest break violation premiums at the same “regular rate of pay” they use for paying overtime.
Contrary to the longstanding practice of most employers, the court held that those break violation premium payments cannot be paid at an employee’s base regular hourly rate. Instead, they must include in the pay rate calculation all wages and other nondiscretionary earnings (such as shift differentials, piece-rate and incentive compensation, and nondiscretionary bonuses). The court also confirmed that its decision will apply retroactively to meal and rest break violation premium payments previously made or owed.
The “Regular Rate” Issue in Ferra
Under California Labor Code section 226.7(c), employers must pay employees one additional hour of premium pay at their “regular rate of compensation” for meal and rest break violations.
Under California Labor Code section 510(a), employers must compensate employees for overtime hours worked at premium rates based on the employee’s “regular rate of pay,” which is a term long understood to encompass not only hourly wages but also other nondiscretionary earnings, such as shift differentials, piece-rate and incentive compensation, and nondiscretionary bonuses.
Central to the parties’ dispute in Ferra was whether the term “regular rate of compensation” as used in section 226.7(c) for meal and rest break violation premium pay has a meaning that is the same as or different from the term “regular rate of pay” as used in section 510(a) for overtime premium pay. The California Supreme Court granted review to resolve whether the California Legislature intended the two terms to be synonymous.
Factual Background and Procedural History in Ferra
The plaintiff in Ferra was a bartender at the defendant employer’s hotel property. The plaintiff received quarterly nondiscretionary bonuses, which, when paid, triggered a recalculation of her “regular rate of pay” for overtime premium payments. However, the employer was not using that recalculated rate for making meal and rest break violation premium payments. Rather, it paid employees an additional hour of premium pay for meal and rest break violations at their base regular hourly rate of pay.
The plaintiff filed a putative class action claiming that “regular rate of compensation” for break violation premium payments was synonymous with “regular rate of pay” for overtime premium payments, and therefore, the employer had underpaid the break violation premiums. The trial court granted summary judgment in favor of the employer on this issue, and the Court of Appeal affirmed, finding that the two phrases were not synonymous, and that the employer had paid the break violation premiums correctly .
California Supreme Court Resolves the Issue
The California Supreme Court granted review and reversed, disagreeing with the lower courts’ interpretation. It held that “the term ‘regular rate of compensation’ in section 226.7(c) has the same meaning as ‘regular rate of pay’ in section 510(a) and encompasses not only hourly wages but all nondiscretionary payments for work performed by the employee” as well. Thus, “premium pay for a noncompliant meal, rest, or recovery period, like the calculation of overtime pay, must account for not only hourly wages but also other non-discretionary payments for work performed by the employee.”
The court explained that, when the California Legislature enacted Labor Code section 226.7, “it did so against the backdrop of long-standing federal law that defined overtime pay in terms of an employee’s ‘regular rate,’ and existing state law that defined overtime pay in terms of an employee’s ‘regular rate of pay.’” It noted that, despite the difference in wording between the federal Fair Labor Standards Act (“regular rate”) and section 510 (“regular rate of pay”), courts and California’s enforcement agencies have understood “regular rate of pay” as used in section 510 and the California Industrial Welfare Commissions’ wage orders to be synonymous with “regular rate” as used in the FLSA. Based thereon, the court found that “regular rate” is the “operative term” in California Labor Code section 226.7(c) and that the California Legislature intended the modifiers “of pay” and “of compensation” to be used interchangeably. Thus, “regular rate of compensation” as used in section 226.7(c) does not have any meaning different or distinct from “regular rate of pay” as used in section 510(a), and is not limited to an employee’s base regular hourly rate.
Ferra Applies Retroactively
Importantly, the California Supreme Court rejected the employer’s assertion that the decision should apply only prospectively, finding no reason to depart from the usual approach that appellate decisions on statutory interpretation apply retroactively. In doing so, the court said “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.” Further, the court reasoned that “‘if we were to restrict our holding to prospective application, we would, in effect, negate’ the full extent of the remedy ‘that the Legislature has determined to be appropriate in this context.’”
Ferra ’s Immediate Impact on Employers
Employers should undertake an immediate review of how they calculate meal and rest break violation premium payments to ensure that employees are paid at the same regular rate of pay used to make overtime premium payments. Thus, the regular rate should include not only hourly wages but also other nondiscretionary earnings, such as shift differentials, piece-rate and incentive compensation, and nondiscretionary bonuses earned during the applicable workweek. In addition to adjusting past regular rate overtime calculations when paying nondiscretionary compensation earned over earlier payroll periods, employers likely will have to make similar adjustments to past meal and rest break premiums payments as well.
Given Ferra’s retroactive applicability, employers should also assess the impact of the decision on any pending meal or rest break litigation, including not only liability exposure but the continued viability of prior rulings. In addition, employers should work with their counsel to determine whether and how to remediate past break violation premium payments made at the wrong regular rate, regardless of whether there is pending or threatened litigation as to such compliance issues.
The retroactive and prospective exposure created by Ferra, and its likely triggering of a new wave of class actions against employers on the issue, provides an appropriate opportunity for employers that have not already done so to assess whether they may now want to implement employee arbitration agreements with class action waivers. Employers should consult with their counsel to decide whether and how to implement such agreements.
Finally, to keep matters in perspective, note that Ferra merely clarifies the proper “regular rate” for making meal and rest break premium payments. It does not speak to employers’ defenses to liability for alleged meal and rest break violations and whether such premium payments are owed in the first place. As the California Supreme Court recognized in Ferra, it still remains that an “employer may defend against such a claim” of meal or rest break violations “as it has always done.”
For additional information regarding the Ferra decision and its impact on meal and rest break compliance practices in California, please contact the authors or any other member of McGuireWoods’ Labor & Employment Department.