California Supreme Court Retroactively Penalizes Employers on Meal and Rest Breaks

Seyfarth Synopsis: The Supreme Court just held that employers, when calculating the premium pay due for failing to provide legally compliant meal and rest periods, must include all nondiscretionary payments—not just pay the premium based on the base straight-time hourly rate. The decision, which overturned a Court of Appeal decision, will apply retroactively. This harsh result stems from a conclusion that the “regular rate of compensation” owed with respect to meal and rest premium pay is synonymous with the “regular rate of pay” owed with respect to overtime wages. Ferra v. Loews Hollywood Hotel, LLC.

Facts  

Jessica Ferra worked as a hotel bartender, earning both an hourly wage and a quarterly nondiscretionary incentive payment. When she was not provided with a legally compliant meal or rest period, she was paid an additional hour of pay at her base hourly rate. This practice was in accordance with a widely held understanding of Labor Code section 226.7, which requires employers to compensate employees for unprovided meal and rest periods by paying an additional hour at the “regular rate of compensation.” Many employers, in responding to this requirement, have paid the base hourly rate, without engaging in the often intricate calculation needed to determine what an hourly rate would be if one factored in other nondiscretionary payments, such as, in this case, quarterly incentive payments.

Ferra brought a class action, arguing that the “regular rate of compensation” owed under Labor Code section 226.7(c) for unprovided meal and rest periods was the same as the “regular rate of pay” owed under Labor Code section 510(a) for purposes of overtime pay. The “regular rate” would include not only the base hourly rate but also other payments, such as nondiscretionary bonuses and commissions.

The Court of Appeal’s Decision

The Court of Appeal affirmed summary adjudication against Ferra, reasoning that calculating premium pay in accordance with the base hourly rate was proper. The Court of Appeal, pointing out that words matter, observed that the Legislature passing Section 226.7 chose the phrase “regular rate of compensation,” and thus departed from the “regular rate of pay” language found in Section 510(a). The Court of Appeal reasonably concluded that these two phrases are “not synonymous, and the premium for missed meal and rest periods is the employee’s base hourly wage.” The Court of Appeal relied on the principle that “[w]here 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.”

Ferra sought review from the California Supreme Court, to obtain clarification of the term “regular rate of compensation” as used by Section 226.7(c).

The California Supreme Court’s Decision

The California Supreme Court agreed to review this question:

Did the Legislature intend the term “regular rate of compensation” in Labor Code Section 226.7, which requires employers to pay a wage premium if they fail to provide a legally compliant meal period or rest break, to have the same meaning and require the same calculations as the term “regular rate of pay” under Labor Code Section 510(a), which requires employers to pay a wage premium for each overtime hour?

The Supreme Court held that the terms of “regular rate of compensation” in Section 226.7(c) and “regular rate of pay” in Section 510(a) are synonymous; accordingly, “regular rate of compensation” encompasses all nondiscretionary payments made to an employee, not just hourly wages. The Supreme Court noted that “the words ‘compensation’ and ‘pay’ appear interchangeably in legislative and judicial usage, and we find no indication that the Legislature intended ‘regular rate of pay’ in Section 510(a) and ‘regular rate of compensation’ in Section 226.7(c) to have different meanings.” The Supreme Court found “no evidence that ‘regular rate of compensation’ means hourly wages only.”

The Supreme Court also concluded that its decision will apply retroactively. The Supreme Court did so even though its result deviated from the opinion of other judges, even though employers may have reasonably relied on the canon that lawmakers presumably intend different meanings when using different statutory words in a statutory scheme, and even though the Supreme Court’s ruling could expose employers to massive liability. The case was remanded to the trial court for further proceedings.

What Ferra Means for Employers 

Employers should immediately review their practices at which they pay meal and rest period premium pay. Even if employers change their pay practice to comport with the Supreme Court’s decision, they must also consider potential liability regarding their former practice.