In Ferra v. Loews Hollywood Hotel LLC, the California Supreme Court addressed the question of whether “regular rate of compensation” under Lab. Code § 226.7(c) has the same meaning as “regular rate of pay” under Lab. Code § 510(a). On July 15, 2021, the California Supreme Court issued its decision holding that the terms are synonymous and therefore, premium pay for missed meal periods and rest periods must account for hourly wages and any nondiscretionary payments.
In this case, the plaintiff was a bartender employed by defendant. She was paid hourly wages as well as nondiscretionary incentive payments. If employees did not receive a compliant meal or rest period, defendant paid employees an additional hour of pay, based on their hourly wage without factoring in any nondiscretionary payments. Plaintiff filed a class action claim against defendant alleging that by not factoring in nondiscretionary payments when calculating premium pay for missed meal and rest periods, defendant failed to pay missed meal and rest periods in accordance with the “regular rate of compensation” required by Lab. Code section 226.7(c).
Defendant argued that that “the regular rate of compensation” under section 226.7(c) and “regular rate of pay” under section 510(a), which governs overtime pay, are not interchangeable and therefore, premium pay for missed meal and rest periods was based solely on the employee’s hourly wage. The trial court and the Court of Appeal both agreed with defendant; however, the California Supreme Court disagreed.
Sections 510(a) and 226.7(c) both use the term “regular rate”. The Court noted that the term “regular rate” was used in Section 7(a) of the Fair Labor Standards Act and interpreted by the U.S. Supreme Court to mean “the actual payments, exclusive of those paid for overtime, which the parties have agreed shall be paid during each workweek.” 1 Thus, the term “regular rate” includes both wages and nondiscretionary payments.
The Court further noted that the history of the sections shows that “pay” and “compensation” were used interchangeably by the legislature and the judiciary and thus the operative term in both sections is “regular rate”. Therefore, the Court concluded that the legislature intended for the terms “regular rate of compensation” under Lab. Code § 226.7(c) and “regular rate of pay” under Lab. Code § 510(a) to have the same meaning—both of which include wages and nondiscretionary payments.
This decision exemplifies how the court liberally construes the Labor Code to favor the protection of employees. Employers should review, and, if necessary, adjust, their methodology for calculating premium pay for missed meal and rest periods to ensure that premium pay includes any applicable nondiscretionary payments. Failure to do so may result in Labor Code violations.
Furthermore, the Court held that the decision is applied retroactively without overruling or disapproving of any previous decisions. Therefore, premium pay for meal and rest periods violations, as laid out in this opinion, would apply to any pending or potential claim arising under Labor Code section 226.7(c) or Business and Professions Code section 17200, et. seq. This means that employers may potentially be exposed to liability under this new ruling for improper payments stretching back as far as four years. As such, employers should audit their records to determine their liability exposure and, if necessary, make attempts to remediate any premium pay for meal and rest period violations to avoid potential costly litigation.
The experienced Labor and Employment attorneys at Palmer Kazanjian Wohl Hodson are available to review and revise existing meal and rest period policies and offer guidance to ensure compliance.
1 Walling v. Harnischfeger Corp. (1945) 325 U.S. 427, 430.