The phrase “Time is Money” is perhaps never more true than when we’re navigating California wage and hour law. A 2021 court ruling regarding the calculation of rest and meal period premiums may have created an important and challenging new step in your payroll process.
As you know, California Labor Code section 510 and IWC Wage Orders require that employees receive overtime compensation at 1.5 times their regular rate of pay for work hours over 8 in a workday or over 40 in a workweek. If an employee receives multiple pay rates in a workweek (for example, a shift differential for certain shifts), or earns commissions or non-discretionary bonuses, the regular rate of pay must be calculated using these amounts.
California Labor Code section 226.7 states that if an employee is not provided with a rest or meal period in accordance with the law, “the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation.” Unlike regular rate of pay, the Labor Code and Wage Orders do not define this term, and employers have historically interpreted the requirement as one additional hour at an employee’s straight-time hourly rate.
A 2015 class action lawsuit, Ferra v. Loews Hollywood Hotel, LLC, challenged this practice. The complainant argued that non-discretionary incentive payments should be included in the regular rate of compensation when calculating rest and meal period premiums. The trial court found in favor of the defendant, saying that the terminology used in the two Labor Code sections were not interchangeable, and the calculations involved in regular rate of pay were not applicable to rest and meal period premiums. In 2019, a Court of Appeals affirmed the trial court’s decision and employers breathed a huge sigh of relief….
….Until July 2021, when the California Supreme Court reversed both the trial court’s and the Court of Appeals’ findings. In its decision, the Supreme Court acknowledged that we are not given a clear definition of the term regular rate of compensation, but held that this does not mean the drafters of the law intended for there to be a different approach. In fact, the Court determined that the terms had been used interchangeably in legislative sessions and court decisions.
Based on this ruling, rest and meal period premiums must be calculated using either a weighted average of the employee’s pay rates and earnings in a workweek, or including non-discretionary incentives received during the workweek. The Court also stated that the ruling would be applied retroactively saying, “no considerations of fairness or public policy” warranted applying the policy only for future practices. (If an employee earns just one hourly rate and no commissions or bonuses, the regular rate of pay is simply the straight-time hourly rate.)
We know that calculating an employee’s regular rate of pay can be extremely confusing. Please contact one of our certified Consultants if you have questions about your current payroll procedures.
