Recent California Supreme Court Decision Significantly Increases Employers’ Potential Liability For Missed Meal And Rest Breaks

Until recently, the question of whether the regular rate of pay should be used to calculate meal and rest period premiums, as compared to an employee’s base hourly rate of compensation, was unanswered. Indeed, most employers currently follow the longstanding practice of using the base hourly rate.

On July 15, 2021, the California Supreme Court unequivocally answered the long-awaited question in Ferra v. Loews Hollywood Hotel, LLC: Employers are required to pay meal and rest break violation premiums at the same regular rate of pay that they use for paying overtime. The Court’s decision applies retroactively. As a result, California employers can expect a new wave of class action and Private Attorney General Act (PAGA) claims based on this decision, clearly favorable to employees.

Regular Rate of “Pay” vs. “Compensation”

Under California Labor Code section 226.7(c), employers must pay employees one additional hour of premium pay at their “regular rate of compensation” for meal and rest break violations. By comparison, under California Labor Code section 510(a), employers must compensate employees for overtime hours worked at premium rates based on the employee’s “regular rate of pay.” The “regular rate of pay” is typically higher than the “regular rate of compensation” because the regular rate of pay includes all nondiscretionary earnings such as shift differentials, piece-rate and incentive compensation (e.g., commissions), and bonuses.

In Ferra, the plaintiff filed a class action lawsuit claiming that “regular rate of compensation” for break violation premium payments was synonymous with “regular rate of pay” for overtime premiums, and therefore, her employer had underpaid the break violation premiums. The trial court granted summary judgment in favor of Loews, finding that the two phrases were not synonymous, and that the employer had paid the premiums correctly. The Court of Appeal affirmed.

In reaching its decision, the California Supreme Court noted that “when construing the Labor Code and wage orders, courts adopt the construction that best gives effect to the purpose” of protecting employees regarding “working conditions, wages, and hours.” That is, courts liberally construe the Labor Code and wage orders to favor the protection of employees. On this basis, the Court found that “regular rate” is the operative term, and that the legislature intended modifiers of “pay” and “compensation” to be used interchangeably. Hence, the Court interpreted the legislature’s intent to apply the same meaning to both terms.

Retroactive Application

The Court rejected Loews’ argument that the decision should apply only prospectively to give employers time to adjust their practices in accordance with the decision. Instead, the Court held that the decision applied retroactively and that employers who have not previously paid premiums at the “regular rate of pay” may be held liable (within the applicable statute of limitations period).

Immediate Steps to Take In Light of Ferra

Employers should consider taking the following steps to minimize any further and/or future exposure of potential liability for missed meal periods and rest breaks:

• Update Payroll Systems: Employers should update their payroll systems to pay meal and rest break premiums based on regular rate of pay. This should include developing a process of identifying retroactive payments for break premiums previously paid at the base hourly rate of compensation.
• Provide Restitution Payments: Employers should consider providing restitution to employees who received meal and rest premiums at their base hourly rate (i.e., regular rate of compensation) within the last four years (in order to cover the applicable statutory period).
• Implement Waiver Program: If not already in place, employers should adopt a meal break waiver program that allows employees to voluntarily waive their first meal break for shifts of 6 hours or less, and their second meal break for shifts that are more than 10 hours (but not more than 12 hours) long. The waiver should be presented to the employee to sign every single time a meal break is waived, as compared to a single waiver signed upon hire, which is common practice.
• Implement Attestation Program: Employers should incorporate a practice where employees confirm, on a daily basis, whether they received their meal period and rest breaks.
• Incorporate Arbitration Agreement: Employers that have not already done so should assess whether they want to implement employee arbitration agreements with class action waivers.

These steps will require a multifaceted approach, which involves an in-depth analysis of the employer’s business policies and practices. Please contact Pearlman, Brown & Wax’s Employment Law attorneys for counsel and guidance related to the Ferra decision, as well as any other wage-and-hour related issues.