The California Supreme Court determined that employers must use the employee’s regular rate of pay in calculating the premium paid to employees who were not provided a meal, rest or recovery period. (Ferra v. Loews Hollywood Hotel, LLC, Cal.LEXIS 4877 (July 15, 2021).) The issue came before the Court because the Legislature enacted ambiguous legislation that called for employers to pay the meal or rest period premium at the employee’s regular rate of compensation. Prior courts determined that the regular rate of compensation meant the employee’s hourly wage. The Supreme Court rejected this position.
This decision requiring an employer to pay the regular rate of pay for a missed meal or rest period premium will have a devastating effect on California businesses in at least three ways.
The Regular Rate of Pay is Often More than the Hourly Rate of Pay. The only time the regular rate of pay and the regular rate of compensation are the same is when the employee does not receive any compensation other than an hourly rate of pay.
However, if an employee earns compensation in addition to an hourly wage, the regular rate of pay will always be more than the hourly wage. This is because in calculating the regular rate of pay, an employer must include all forms of compensation.
The precise method of calculating the regular rate of pay will differ depending on the type of extra compensation earned. Consider the employee who worked 40 hours and earns $15 plus a production bonus of $100. The regular rate of pay is calculated at dividing total compensation by total hours. Here, the calculation is ($15 x 40 hrs) + $100 = $700
40 = $17.50. The premium which must be paid for a missed meal or rest period is $17.50.
The Premium Could Vary From Week to Week. Consider the example above. In the first week the employee earns a $100 commission. In the subsequent week, the employee earns a $200 commission. The regular rate of pay in the second week is $20. This means employers will need to make constant reviews of compensation earned in each workweek to pay the employee correctly.
In addition, will the employer be required to make adjustments to prior pay periods if a bonus is not paid until the last pay period in a quarter or in the year?
The Court’s Decision is Retroactive. The Court determined that its ruling, requiring employers to pay the regular rate of pay as the premium for missed meal and rest periods, is retroactive. This means employees can make claims for unpaid meal and rest periods for the past four years. Consider the employer who paid its employees a meal or rest period premium calculated at the hourly wage. Will the employer now be required to go back and increase the amount of the premium paid based on the regular rate of pay during that workweek or pay period?
Moreover, consider the employer who does not go back and make additional payments. Or consider the employer who paid a meal or rest period premium based on the hourly wage and the employee has since left the workplace. Since a meal or rest period premium is considered to be a wage, that means the employer did not pay all wages due at the time of termination. That employer could be held liable for 30 days of waiting time penalties calculated at the employee’s daily wage.
Employers should consider whether or not to provide employees with non-discretionary bonuses such as safety or production bonuses, on-call payments, benefits for meals or gym memberships, and any other similar payments. This extra compensation creates a regular rate of pay that is higher than the hourly rate of pay.
Discretionary pay, which is determined in the sole discretion of the employer, is not part of the calculation for the regular rate of compensation. Thus, I recommend employers use discretionary bonuses if they want to provide employees with additional pay for superior performance.
Employers should also consider reviewing their payroll to see what premium payments were made to employees in the past. Employers need to consider whether or not they need to supplement those prior payments so that the premium equals the regular rate of pay.
I recommend every business to contact its legal counsel to consider the impact of the Court’s opinion on its workplace. Wage and hour matters are already complex issues. The Court has now made these issues even more complex and the Court has also opened the door for more potential liability.
Fishman, Larsen & Callister