Non-exempt employees in California who work more than five hours in a day are guaranteed at least one 30-minute unpaid meal break that must be taken no later than the end of the employee’s fifth hour of work. California Labor Code § 226.7 requires employers to pay employees a premium payment of “one additional hour of pay at the employee’s regular rate of compensation” if the employees are not provided with a compliant meal break (e.g. if the meal break is less than 30-minutes or if the employees are required to continue working during their meal period).
In the July 15, 2021 decision of Ferra v. Loews Hollywood Hotel, LLC, the California Supreme Court clarified how the “regular rate of compensation” must be calculated under section 226.7. The Court held that the calculation must include all nondiscretionary forms of payments. In other words, if employees receive nondiscretionary compensation (such as commissions or structured bonuses) on top of their normal salary, the premium payment calculation must also take into account this additional income. Importantly, the Ferra decision also applies retroactively.
In Ferra, the plaintiff was a bartender at the Loews Hollywood Hotel. She earned an hourly wage as a non-exempt employee and quarterly nondiscretionary incentive payments. If the plaintiff was not provided with a compliant meal period, Loews paid the plaintiff a premium wage according to her hourly rate of pay. Loews did not factor in the nondiscretionary payments into its premium wage calculation. The plaintiff filed a class action lawsuit against Loews arguing, among other issues, that Loews did not pay its employees their “regular rate of compensation” when it omitted nondiscretionary earnings from its calculations.
The Ferra Court relied heavily on prior rulings regarding overtime wages under the federal Fair Labor Standards Act (“FLSA”) and California Labor Code § 510. The FLSA and section 510 both state that overtime must be calculated based on the employees’ “regular rate of pay.” State and federal decisions have interpreted this language to mean that overtime rates must be calculated to include all nondiscretionary forms of income. In Ferra, the defendants argued that section 226.7, which uses the term “regular rate of compensation,” differed from the FLSA and section 510, which used the term rather “regular rate of “pay.” The Ferra Court disagreed, holding that the terms “compensation” and “pay” are synonymous. Based on prior authority, “regular rate of compensation” for premium wages must be calculated at a rate that includes nondiscretionary compensation.
Another problematic issue for employers is that the Ferra decision applies retroactively. Generally, the statute of limitations on a meal violation claim is three years, but the statute of limitations can be expanded to four years if the employee also alleges unfair business practices. As such, employers who have paid premium wages for non-compliant meal breaks over the past four years must determine if their employees are entitled to additional compensation based on nondiscretionary income. Employers should consider correcting any deficient premium wage payments over the last three to four years and implementing new policies.
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Matthew Wallin is a senior associate in the Los Angeles office where he practices labor and employment law. He has extensive experience defending private business and public entities in litigation and advising clients on labor compliance issues.
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