Calculating the Missed Meal or Rest Period Premium

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Tom Wolfe, Managing Partner of Moore Brewer Wolfe Jones Tyler & North.

In Ferra v. Loews Hollywood Hotel, LLC, 11 Cal.5th 858 (July 15, 2021), the California Supreme Court took up the issue of how to calculate the one hour of premium pay due an employee for a missed meal, rest or recovery period under California Labor Code §226.7(c). The Court unanimously held that this hour is to be paid at the “regular rate of pay,” which, like the calculation used for overtime pay, takes into consideration any nondiscretionary compensation in addition to the employee’s base hourly rate. The regular rate of pay can be higher than the base hourly rate for employees whose income is impacted by things such as commissions and nondiscretionary bonuses. Because the Court also applied its decision retroactively, employers may find themselves with an unexpected area of potential exposure that should be discussed with legal counsel.

Background

Under California law, nonexempt employees are generally entitled to one paid rest break of at least 10 minutes for every four hours worked, or major fraction thereof, unless the employee’s total work time is less than three and one-half hours for the workday. In addition, non-exempt employees are entitled to one uninterrupted unpaid meal period of at least 30 minutes if they work more than five hours in the workday. Employees who work longer hours may be entitled to additional rest and meal periods. Under certain conditions, employers are also required to provide a “recovery period” (a cooldown period to prevent heat illness).

Labor Code §226.7(c) imposes a penalty of one additional hour of pay for each workday that a required meal, rest or recovery period is not provided. It states:

(c) If an employer fails to provide an employee a meal or rest or recovery period in accordance with a state law, including, but not limited to, an applicable statute or applicable regulation, standard, or order of the Industrial Welfare Commission, the Occupational Safety and Health Standards Board, or the Division of Occupational Safety and Health, the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each workday that the meal or rest or recovery period is not provided. [emph. added]

The Ferra case examines what is meant by the employee’s “regular rate of compensation.”

Ferra Decision

Plaintiff Jessica Ferra (Ferra) was a bartender for defendant Loews Hollywood Hotel, LLC (Loews). Her compensation was made up of an hourly wage as well as quarterly nondiscretionary incentive payments, i.e., payments made pursuant to a contract, agreement or promise and not at the sole discretion of the employer. Ferra filed a class action against Loews alleging, among other things, that Loews did not factor in nondiscretionary incentive payments when calculating premium pay for a noncompliant meal or rest period.

The trial court granted summary judgment in favor of Loews, upholding its calculation of premium pay at an employee’s base hourly rate without factorings in nondiscretionary incentive payments. The court agreed with Lowes’s argument that “regular rate of compensation” under §226.7(c) applicable to premium pay is not interchangeable with “regular rate of pay” under §510(a) applicable to overtime pay. The Court of Appeal agreed that the terms are not synonymous and affirmed the trial court’s finding that premium pay is at the employee’s base hourly rate alone.

In reversing the lower courts, the California Supreme Court first noted that §226.7(c) refers to one additional hour of pay at the employee’s “regular rate of compensation,” which language is similar to that appearing in the applicable Industrial Welfare Commission (IWC) wage order. [While IWC Wage Order No. 5-2001 applies to hotel workers and bartenders, this particular language is identical to that appearing in IWC Wage Order No. 4-2001 applicable to professional, technical, and clerical employees, which includes most credit union employees.] “Regular rate of compensation” is not specifically defined in either §226.7(c) or the wage order.

The Court considered various principals of statutory construction to determine the legislative intent. In doing so, it pointed out that it will adopt the construction designed to best uphold the purpose of the Legislature and the IWC, which is the protection of the employee. Accordingly, both the Labor Code and the wage orders will be liberally construed in favor of the employee. When there are potentially conflicting interpretations, the Court will consider “the ostensible objectives to be achieved by the statute, the evils to be remedied, the legislative history, public policy, contemporaneous administrative construction and the statutory scheme of which the statute is a part.”

The Court of Appeal agreed with Loews and relied on the principal of construction that says: “Where 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.” In other words, the Legislature could have chosen to use “regular rate of pay” had it intended that particular meaning.

However, the Supreme Court, pointed to another principal of construction that says: “Where statutes use synonymous words or phrases interchangeably, those words or phrases should be understood to have the same meaning.” When §226.7(c) was adopted, “regular rate of pay” already had a long history of use in connection with overtime pay calculations under both state and federal law, which included nondiscretionary incentive payments. Both §226.7(c) and §510 use the term “regular rate,” which is a term of art that has historically included both hourly wages and nondiscretionary payments. In calculating overtime, “regular rate of pay” has been defined more expansively than the base hourly rate for purposes of employee protection – to ensure that employees whose compensation is made up of both a base hourly rate and nondiscretionary compensation are not unfairly penalized by excluding certain aspects of their regular compensation when calculating overtime rates.

The differing terms of “compensation” and “pay” have been used interchangeably by the legislature and the courts, and there has been no evidence of an intent to ascribe different meanings to them in this context. In fact, the terms are used interchangeably in the very text of §226.7(c) and §510.

The legislative history here is significant. When the Legislature first adopted §510, it also directed the IWC to rewrite its wage orders to restore daily overtime pay at one and one-half times the “regular rate of pay.” At the same time (June 2000), the IWC also adopted a premium pay requirement for missed meal or rest breaks at the “regular rate of compensation.” In explaining the purpose of these provisions, an IWC commissioner explained both as disincentives for employers to either work an employee more than the full-time daily hours or fail to provide required meal or rest periods. Moreover, the IWC characterized this premium in subsequent testimony as “one additional hour of pay at the employee’s regular rate of pay.” In other words, these provisions were treated as analogous with no indication that a different meaning was intended. When §226.7(c) was added, it used “regular rate of compensation” to track with the language of Wage Order No. 5-2001.

The Court rejected the argument that because premium pay under §226.7(c) is not proportional to time worked, it isn’t analogous to overtime premiums. The purpose isn’t to compensate the employee for time worked but for possible noneconomic injuries resulting from working extended hours or working through breaks.

The court concluded that this one-hour premium is intended to be paid at the “regular rate of pay,” which is the overtime rate calculation that takes into consideration any nondiscretionary compensation in addition to the employee’s base hourly rate.

Retroactive Application

The more challenging part of this decision is that the Court specifically held this interpretation to apply retroactively. With limited exceptions, judicial decisions are generally retroactive. The Court pointed to the divided Court of Appeal decision, conflicting federal district court opinions, and the fact that it has not previously issued a decision on this particular issue to conclude that there was no basis for reasonable reliance on the state of the law that might otherwise prevent retroactive application.

The Court rejected Loews’ argument that retroactive application would expose employers to “millions” in liability as unsubstantiated. The Court went on to state that, “even if Loews were correct, it is not clear why we should favor the interest of employers in avoiding ‘millions’ in liability over the interest of employees in obtaining the ‘millions’ owed to them under the law.”

The Court went on the state that, “if we were to restrict our holding to prospective application, we would, in effect, negate” the full extent of the remedy “that the Legislature has determined to be appropriate in this context,” thereby “exceed[ing] our appropriate judicial role.”

The Court reversed the decision of the Court of Appeal and remanded the matter for further proceedings consistent with this interpretation.

What Credit Unions Need to Know

It is important for employers to ensure that their systems for calculating the hour of premium pay for a missed rest or meal period are set up to reflect the “regular rate of pay.” This also means that employers need to have a clear understanding of whether any particular category of an employee’s compensation falls under the heading of “nondiscretionary” and must therefore be included with the employee’s base hourly rate in the calculation of “regular rate of pay,” as with the calculation used for computing overtime pay.

Employers are also encouraged to ensure that their policies reflect the importance of accurate time reporting and taking all applicable rest and meal periods in a timely manner, as well as the prohibition against off-the-clock work. These policies should be clearly communicated to employees and consistently enforced. Employers who offer employees the ability to voluntarily waive a meal period when the employee works six hours or less (or 12 hours or less to waive the second meal break) may also want to discuss this policy with legal counsel to ensure that it meets the legal requirements and appropriate documentation and safeguards are in place.

Retroactive application also means that employers who have been paying this hour of premium pay at the base hourly rate may now have exposure if applying the incorrect calculation resulted in any underpayment, even if they did so in good faith. Employers who believe they may have calculated the regular rate of pay incorrectly are strongly encouraged to consult with legal counsel to determine the appropriate course of action and whether restitution is warranted, as this type of violation carries the risk of representative actions under the Private Attorney General Act (PAGA) and the potential for civil penalties.

Article by Tom Wolfe, Managing Partner of Moore Brewer Wolfe Jones Tyler & North.

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