On June 15, 2021, in Ferra v. Loews Hollywood Hotel, LLC, the California Supreme Court held that the term “regular rate of compensation” means the same as the “regular rate of pay” and not the employee’s base hourly rate. This holding is important for California employers because it means that premiums for non-compliant rest, recovery and meal periods must be paid at the regular rate of pay. An employee’s regular rate of pay is often higher than his or her base hourly rate because it includes “all remuneration,” including categories such as shift differentials, commissions, and many types of bonuses. As such, this ruling should spur employers to review their payroll calculations to ensure that all rest, recovery and meal periods were paid at the regular rate of pay, particularly because this decision applies retroactively.

Rest, Recovery and Meal Period Premiums

Under California Labor Code 226.7(c), an employer who “fails to provide a meal or rest or recovery period . . . 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.” (Emphasis added). Neither the California Labor Code nor the Industrial Welfare Commission Wage Orders define the term “regular rate of compensation.”  Some interpreted this phrase to mean an employee’s base hourly rate, and others interpreted this to have the same meaning as “regular rate of pay.” Again, the holding in Ferra is that the regular rate of compensation is not the base hourly rate. Rather, the regular rate of compensation is the same as the regular rate of pay.

What is the Regular Rate of Pay?

The term “regular rate of pay” is derived from the Fair Labor Standards Act (“FLSA”), a federal law which requires all employers to pay overtime compensation at a “rate not less than one and one-half times the regular rate at which he is employed.” (See the Department of Labor’s Overview of the Regular Rate of Pay under the FLSA here.) The FLSA defines the “regular rate” as including “all remuneration for employment paid to, or on behalf of, the employee,” with the exception of eight narrowly-defined categories of compensation. Thus, the regular rate of pay includes many commonly used forms of compensation in addition to hourly pay such as commissions, shift differentials, hazard pay, many kinds of bonuses, including production bonuses, sales bonuses, and attendance bonuses, and with few exceptions, additional pay for work performed on weekends or holidays. Where an employee is paid two different hourly rates during the same workweek, the regular rate of pay is typically the weighted average of the different hourly rates, as opposed to the lowest or highest of the different rates.

In addition to overtime, recent COVID-related supplemental paid sick leave laws also require employers to pay the higher rate of certain calculations, including the regular rate of pay. As such, payroll systems should be easily adjusted to pay non-compliant rest, recovery, and meal periods at the regular rate of pay.

California law takes the regular rate of pay concept even further. California law requires employers to pay overtime at one and a half times the regular rate of pay, and double time at twice the regular rate of pay. (See the California Labor Commissioner’s website regarding its overtime provisions here.) California’s paid sick leave law (see our prior blogs here and here) requiring employers to provide employees three days or 24 hours of paid sick leave also requires payment of the sick leave hours using, for non-exempt employees, either (1) the regular rate of pay, or (2) by dividing the employee’s total wages, not including overtime premium pay, by the employee’s total hours worked in the full pay periods of the prior 90 days of employment, which is a slightly truncated version of regular rate of pay. California law also requires reporting time pay to be paid at the regular rate of pay. And now, following the Ferra decision, California employers must also pay rest, recovery and meal periods at the regular rate of pay.

• Read more about the California 2021 COVID supplemental paid sick leave requirements here.
• Read here for the federal Department of Labor’s guidance on the regular rate of pay calculation relating to the Families First Coronavirus Act.

Keep in mind that calculating the regular rate of pay can be complicated. The precise formula employers must use to calculate the regular rate often depends on the details or conditions under which certain additional sums are earned. For example, in Alvarado v. Dart Container Corp., the case centered on which formula should be used to calculate the regular rate of an employee who earns a flat sum attendance bonus, as opposed to an attendance bonus that is tied to the number of hours worked. Read our blog here.

Background on the Plaintiff

The plaintiff in this case, Jessica Ferra, worked as a bartender for the employer, Loews. Loews paid Ferra a base hourly wage plus quarterly nondiscretionary incentive payments. However, for any non-compliant meal period (i.e., late, interrupted or missing), Loews paid Ferra her base hourly rate. In 2015, Ferra filed a class action lawsuit against Loews, alleging among other things, that Loews failed to pay meal period premiums using the more employee-friendly regular rate of pay, and instead paid all such premiums at her base hourly rate. The lower courts found in the employer’s favor, holding that the regular rate of compensation and regular rate of pay were different rates. Ferra appealed her case to the California Supreme Court, which delved into the history of the term “regular rate of compensation” and legislative intent in use of that phrase in Labor Code section 226.7. They found, that the “regular rate of compensation” means the same as “regular rate of pay” for purposes of meal, rest and recovery periods in California.

For more information regarding rest, recovery, and meal period requirements, see the following SHLC blogs:

• Carrington v. Starbucks: Proof that Mere Minutes Matter Under California Wage and Hour Law
• DLSE Updates FAQ Page for Rest Break Compliance
• Common Myths for Heat Illness Prevention (California)
• California Court Decision Backs “Preferred” Schedule for Meal and Rest Periods
• SB-142 Expands California Employers’ Lactation Accommodation Requirements
• Troester v. Starbucks (July 26, 2018): California Supreme Court Views De Minimis Doctrine As A Cup Half Empty Under California’s Wage and Hour Laws
• New California Piece-Rate Rules Could Change Hourly-Plus-Bonus Pay Structures
• CA High Court Says “On-Call” Rest Periods Violate Law, Reinstates $90 Million Award

Additionally, SHLC has the following podcasts:

• Meal Period and Rest Breaks: New Changes Happening Under California Employment Law
• CA Supreme Court Issues Important Decision re CA Wage and Hour Laws

Employer Takeaways

• Employers should audit their past and current practices. Wage and hour lawsuits typically go back three or four years in California. Make sure to pay the meal, rest and recovery premium pay at the regular rate of pay.
• Those employers who have not paid regular rate of pay for meal, rest and recovery periods, should consult qualified legal counsel regarding various options for addressing the situation in light of this retroactive court decision.
• This case and other new California laws for employers will be discussed at our upcoming Wage and Hour Law for California Employers live webinar on September 8, 2021. For more information on these and other events, visit our Events Page.

Tags: regular rate of pay; attendance bonus; class actions; DLSE; flat sum bonus; regular rate of compensation; meal periods; rest periods; lactation accommodation; recovery periods; premium pay