November 24, 2021
Under California law, employers are required to pay their employees the amount of wages owed for the time they worked and to pay those wages in a timely manner.  For the most part wages must be paid at least twice during each calendar month on the days designated in advance as regular paydays.  A case the California Supreme Court ruled on this summer, Ferra v. Loews Hollywood Hotel, LLC, adopted a new standard for calculating premium pay for noncompliant meal, rest and recovery periods and will be discussed further below. 
In Ferra, Jessica Ferra, a bartender for Loews filed a class action lawsuit against Loews Hollywood Hotel, LLC, alleging when employees were not provided with compliant meal or rest periods, Loews failed to pay its hourly employees the correct rate of compensation for premium pay as required by California Labor Code section 226.7(c).  Ferra also argued Lowes did not factor in nondiscretionary quarterly incentive payments that she earned into the rate of pay when calculating her premium payments. 
The trial court ruled in favor of Loews and the appellate court affirmed. The question before the California Supreme Court was “whether the Legislature intended ‘regular rate of compensation’ under section 226.7(c) to have the same meaning as ‘regular rate of pay’ under section 510(a), such that the calculation of 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 nondiscretionary payments for work performed by the employee.” 
California Labor Code Section 226.7(c) provides that “[i]f an employer fails to provide an employee a meal or rest or recovery period in accordance with state law . . . the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each work day that the meal or rest or recovery period is not provided.”  The term “rate of compensation” is not defined in the California Labor Code.
California Labor Code section 510(a), uses the term “regular rate of pay” when describing the employer’s obligation to pay overtime. Under Section 510(a), the employer must account for nondiscretionary payments received by the employee when calculating overtime and must use the “regular rate of pay” when doing so. 
Ultimately, the Supreme Court held the terms “regular rate of pay” and “regular rate of compensation” are the same and that compensation under section 226.7(c) must “encompass all nondiscretionary payments, not just hourly wages.” 
Therefore, pay premium payments to employees for missed meal, rest, and recovery breaks must be at the employee’s “regular rate of pay” instead of their base hourly rate and include nondiscretionary payments, that employees may have earned in addition to hourly wages into the calculation of premium pay.
As a result of the California Supreme Court’s decision, employers will want to consider steps to take in order to avoid liability. Because the decision applies retroactively, employers could face liability for previous practices of paying premiums at the base rate of pay.
Employers will need to update their policies to ensure they use employee’s regular rate of pay when paying meal and rest break premiums. Many employers used the base hourly rate when paying meal and rest break premiums and as a result may be liable.
However, for employees to establish they are entitled to premium pay, they need to establish they were not provided with compliant meal and rest periods. Additionally, Ferra did not eliminate any defenses employers can claim alleging failure to provide compliant meal and rest periods. 
California employers should be prepared for class action claims if they had a practice of paying premiums at the base rate of pay.
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