Most California employers know that under Labor Code § 226.7(c), employees who are not provided with a compliant meal, rest, or recovery period must be paid an additional hour of pay for each violation.  Most California employers have deemed that to mean an hour of pay at the established hourly wage.  The California Supreme Court has just held that the penalty includes not just the established hourly wage, but all non-discretionary payments as well.

Ferra v. Loews Hollywood Hotel, LLC, S259172 (July 15, 2021), involved a class action alleging, among other things, that when Loews paid the penalty for a non-compliant meal or rest breaks, it paid only the established hourly wage and no more.  Plaintiff argued that “regular rate of compensation” under Labor Code § 226.7(c) had the same meaning as “regular rate of pay” under Labor Code § 510(a), governing overtime.  Thus, the plaintiff argued, just as “regular rate of pay” for overtime purposes included more than simply the established hourly wage, so, too, did “regular rate of compensation” under Labor Code § 226.7(c).

In Ferra, the plaintiff received quarterly nondiscretionary incentive payments.  Both the trial court and the appellate court concluded that “regular rate of compensation” under Labor Code § 226.7(c) referred to the employee’s base hourly wage and so did not require the inclusion of any other form of payment.

The California Supreme Court reversed.  Although it could find nothing in the legislative history establishing that “regular rate of compensation” and “regular rate of pay” were specifically intended to mean the same thing, and further despite noting that “regular rate of compensation” could reasonably be construed to mean either hourly wages or hourly wages plus non-discretionary payments, the Court chose to focus on the similarity between “regular rate,” which phrase appears in both larger phrases.  On this basis, the Court concluded that use of the words “regular rate” in both statutes led to the conclusion that Legislature intended that “regular rate of compensation” was “synonymous with ‘regular rate of pay,’ a term-long understood to encompass not only hourly wages but also non-discretionary payments[.]” In other words, the later of the two statutes – Section 226.7(c) – would be read to impose the same requirements as the earlier statute, Section 510(a).

(Although the issue in Ferra arose from nondiscretionary incentive bonuses, the decision applies to any form of compensation that would be included in calculating the regular rate for overtime purposes.)

Finally, and to add insult to injury, the Court also concluded that its decision applied retroactively.  Thus, the decision applies not only to payments made in the future but also to payments that employers already have made.

The decision in Ferra presents California employers with two challenges.  The first is to ensure that all future premium payments for non-compliant rest, meal, and recovery periods are paid at the “regular rate” as that term is understood in the overtime context.  The second issue is whether and to what extent to retroactively adjust payments previously made.  In this regard, the premium payments are considered wages, and subject to a three-year statute of limitations.

Navigating in the wake of Ferra will be challenging, and employers will have important decisions to make.  If you have any questions about these issues, please contact your SGR Labor and Employment counsel.