California Supreme Court Requires Break Premiums be Paid at the Regular Rate
On July 15, 2021, the California Supreme court issued the landmark decision of Jessica Ferra v. Loews Hollywood Hotel LLC, (California Supreme Court Case S259172, decided July 15, 2021) holding that meal, rest and recovery periods must be paid not at an employee’s base hourly rate, but at their “regular rate of pay.”
In California, the Labor Code requires non-exempt employees are required to receive 30-minute meal breaks and 10-minute rest breaks, and sometimes additional breaks depending on the number of hours worked. When a break is not provided, the employee is entitled to a penalty equal to one hour of pay. Until the decision in Ferra most employers paid the penalty wages of 1 hour of pay at the base rate. It was easy for payroll to process and easy to explain to employees assuming the paystub identified the type of break pay (meal v rest) and number of hours of each.
The Court observed that “Under California law, employers must provide employees with overtime pay when employees work more than a certain amount of time (citing California Labor Code section 510(a)). To calculate overtime pay, section 510(a) requires an employer to compensate an employee by a multiple of the employee’s “regular rate of pay.” California law also provides for meal, rest, and recovery periods. If an employer does not provide an employee with a compliant meal, rest, or recovery period, section 226.7, subdivision (c) (Labor Code section 226.7(c)) requires the employer to “pay the employee one additional hour of pay at the employee’s regular rate of compensation.”
The question was whether the Legislature intended “regular rate of compensation” under Labor Code section 226.7(c) to have the same meaning as “regular rate of pay” under Labor Code section 510(a), and held that the regular rate of pay encompasses “meal, rest, or recovery period, like the calculation of overtime pay.”
Historically, regular rate of pay was primarily used for calculating overtime, which is defined as time and a half (1.5) or two (2) times the regular rate of pay.
An employee’s regular rate of pay is often higher than their base hourly rate because the regular rate includes additional compensation, such as nondiscretionary bonuses, shift differentials, commissions and piece rate pay. Under the Ferra decision, not only must premiums now be paid at the regular rate of pay, but the ruling applies retroactively, meaning that liability for noncompliance could reach back four years from July 15, 2021 back to July 15, 2018.
According to court documents, Jessica Ferra was a bartender employed by Loews and her wages included both hourly wages and quarterly nondiscretionary incentive payments, also known as incentive bonuses. Pursuant to California Labor Code section 226.7 and the Industrial Welfare Commission (“IWC”) wage orders, which entitle employees to an additional hour of pay at the “regular rate of compensation” when breaks are not provided, Loews paid a one-hour premium for noncompliant breaks.at employees’ base hourly rate as almost employers have traditionally paid for decades.
Regular Rate of Compensation Includes Regular Rate of Pay
Ferra brought a class action on behalf of Loews’ non-exempt employees, alleging that “regular rate of compensation” means “regular rate of pay,” and that break premiums should have incorporated all nondiscretionary incentive payments in addition to the base hourly rate. Ferra argued that in enacting Labor Code section 226.7 and the wage orders, the Legislature and IWC intended “regular rate of compensation” to be synonymous with “regular rate of pay,” and the difference in word choice did not signify an intent to apply a different meaning.
Loews countered that the phrase “regular rate of pay” is a “term of art” and not binding on meal, rest and recovery pay. Therefore, in requiring break premiums to be paid at the regular rate of compensation while defining overtime in terms of regular rate of pay, the Legislature intended for these phrases to carry different meanings.
The California Court of Appeal, Second Appellate District, agreed with Loews in a 2-1 decision, relying on the principle articulated in the California Supreme Court’s 1999 decision in Briggs v. Eden Council for Hope & Opportunity (1999) 19 Cal.4th 1106 [an Anti-SLAPP case] that “[w]here different words or phrases are used in the same connection in different parts of a statute, it is presumed the Legislature intended a different meaning.” Ferra v. Loews Hollywood Hotel, LLC, (2019) 40 Cal.App.5th 1239, 1247.
Ferra appealed, and in a unanimous decision authored by Justice Goodwin Liu, the California Supreme Court found, quoting from the appeals court’s dissenting opinion, that “[w]hen the Legislature enacted [Labor Code] section 226.7 in 2000, it did so against the backdrop of long-standing federal law that defined overtime pay in terms of an employee’s ‘regular rate.’“ The court noted that later jurisprudence appeared to identify “regular rate” as the operative term.
Legislative history and the Industrial Welfare Commission’s statement as to the basis and also indicated that the commission and Legislature may have used “regular rate of pay” and “regular rate of compensation” interchangeably. Thus, the court reasoned, the term of art at issue was actually “regular rate,” and “regular rate of pay” and “regular rate of compensation” did, in fact, mean the same thing.
Ultimately, the court fell back on the purpose behind the Labor Code and IWC wage orders, which is to protect employees and to address concerns about their “working conditions, wages, and hours.”
Ferra Applies Retroactively
In most circumstances, judicial decisions are applied retroactively, whereas laws passed by legislation apply prospectively. See Vazquez v. Jan-Pro Franchising Int’l Inc. (2021) 10 Cal. 5th 944. Narrow exceptions to retroactivity exist for judicial decisions that change a settled rule.
In commentary that may be unsurprising following the California Supreme Court’s January decision in Vazquez where the Court examined the retroactivity of another landmark ruling from 2018, Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal. 5th 903, the court declined to apply Ferra prospectively only. The court reasoned that because the appeals court decision was divided, and federal district courts were conflicted, there was no settled law regarding the proper rate of break premium pay and thus no exception to retroactivity applied.
The statute of limitations for meal and rest break violations is up to four years when plead in conjunction with a Business & Professions Code claim, meaning that employees may bring claims with liability extending as far back as four years. As a result, this case applies to any employee who is legally entitled to meal and rest breaks and who receives overtime during a pay period where a meal or rest period premium pay was paid at the non-regular rate of pay, any form of non-discretionary compensation in addition to hourly wages, or base salary in the case of a salaried non-exempt employee. This decision could apply to:
- Commissioned sales employees who may be exempt from overtime, but who are still subject to meal and rest break laws (such as inside sales employees);
- Employees who receive shift differential pay, commonly seen in health care and manufacturing settings;
- Non-exempt employees who receive nondiscretionary bonuses, such as safety bonuses, attendance bonuses, meet-target bonuses, profit-based bonuses, retention bonuses and many performance-based bonuses;
- Non-exempt employees who receive piece-rate pay, commissions or other production-based compensation, often seen in manufacturing, sales and recruiting roles; and
- Transportation workers who do not fall under the Federal Motor Carrier Safety Act, who are subject to California’s meal and rest break laws.
What Does This Mean for Employees and Employers?
Essentially this ruling is another big win for employees in the state of California. This decision changes the way employers calculate break premiums and the way it has been presumed complaint for the past two decades but does not alter employers’ underlying obligation to provide compliant breaks, or their defenses. The court noted, an employer “may defend against” meal and rest break claims “as it has always done.”
The case also does not create derivative liability from underpayment of premiums, such as wage statement violations or waiting time penalties — rather, that question is to be addressed by the California Supreme Court in the pending case of Naranjo v. Spectrum Security Services Inc. See https://www.courts.ca.gov/documents/ws123019.pdf
This case is an absolute problem for employers. Where employers are most likely to feel the impact of Ferra is in the logistical considerations of adjusting premium rates, as well as in litigation and that employers must start adjusting premiums rates.
First and foremost, employers should promptly work with their payroll vendor to pay break premiums at the regular rate. They should also verify correct calculation for the regular rate.
In its simplest form, the regular rate of pay is the quotient of all compensation for the week (except enumerated categories, such as overtime premiums and discretionary bonuses) divided by hours worked. Due to these complexities, employers should not assume that their payroll vendor [Such as Paychex or ADT] will automatically know what to include in their regular rate calculations.
Second, for litigation, Ferra means not only an increase in potential damages, but also a heightened risk of class certification and Private Attorneys General Act penalties.
Third, since Ferra decision is retroactive, employers should also assess potential retroactive liability and consider adjustments for prior premiums. Courts have broad discretion to decrease PAGA penalties down from the statutory default, and prompt remedial action is a commonly considered factor in that determination.
Questions will still remain, as when must premiums be paid? Can employers now change their premium payment schedule so that premiums are paid in the following pay period, without running afoul of unsettled law regarding whether break premiums should be treated like wages?
For employees, this will undoubtedly result in increased payments both pre-and post-litigation. This decision follows the pro-employee ruling recently finding that rounding of meal periods also violates the Labor Code. In February 2021, the California Supreme Court invalidated rounding of time for meal breaks and established a presumption of noncompliance where time records do not reflect compliant meal breaks, rather than requiring employees to first prove that the employer failed to provide breaks. Donohue v. AMN Services, LLC (2021) 11 Cal. 5th 58.
One of the largest hurdles in meal and rest break class actions is their burden to prove that there exists enough commonality between absent class members such that their claims can be adjudicated on a representative basis. Regular rate cases are easier to certify than most other cases and this element may be easier to meet for systemic underpayment of break premiums, especially where the regular rate is already considered for overtime.
If you are an hourly employee and have any questions about whether you have been paid properly for off-the-clock work or meal and rest break violations in California, or if you believe you may have a claim against your employer for any violation of the Fair Labor Standards Act, please feel free to call us at 949.458.9675 or email Rich Quintilone II Esq at firstname.lastname@example.org, if you have any questions or go to www.quintlaw.com.