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SUPREME COURT APPLIES OVERTIME PRINCIPLES TO MEAL PERIOD PREMIUMS, DISCOURAGING INCENTIVE PROGRAMS


On July 15, 2021, the California Supreme Court issued its anticipated decision in Ferra v. Loews Hollywood Hotel, LLC, ___ Cal. 5th ___ (2021), a case involving the meal and rest period premiums required by California law when violations occur. The Supreme Court disagreed with the trial and court of appeal decisions holding that premiums should be calculated at an employee’s base rate of pay. Instead, they must be computed based on the “regular rate of pay” used to calculate overtime pay. The decision will cause employers throughout California to reexamine the way they have calculated premiums. Many will also choose to reexamine the desirability of paying bonuses and wage incentives of any kind, including incentives paid weekly, biweekly, monthly or quarterly, due to their impact on the calculation of meal and rest period premiums along with overtime. They also create additional burdens regarding pay stub compliance.

1. The Statutory Structure

Labor Code Section 226.7 requires employers to pay premiums equal to an extra hour of pay at the “regular rate of compensation” if an employee is not provided meal and rest periods that comply with state law. The term used in Section 226.7 differs from the language used to address the overtime requirements in state and federal law, the “regular rate of pay.” The Supreme Court concluded that the terms are synonymous. Thus, the premium owed for meal and rest period violations must be calculated in the same manner the regular rate of pay is calculated for overtime purposes rather than an employee’s base hourly rate.

2. The Significance Of The Decision

This means that various elements of pay, such as incentive pay and shift differentials, must be factored into meal and rest premiums just as they are factored into the overtime rate. Premiums are owed when an employer fails to provide timely and compliant meal and rest periods. The Court stated “that the term ‘regular rate of compensation’ in Section 226.7(c) has the same meaning as ‘regular rate of pay’ in Section 510(a) and encompasses not only hourly wages but all nondiscretionary payments for work performed by the employee.”

The case was filed by a bartender of Loews Hollywood Hotel, LLC. She was paid hourly wages as well as quarterly nondiscretionary incentive payments. The Court viewed the term “nondiscretionary payments” to mean payments for an employee’s work that are owed pursuant to a prior contract, agreement or promise,” not “determined at the sole discretion of the employer.” See DLSE Enforcement Policies and Interpretations Manual § 49.1.2.4 (3); 29 C.F.R. §§ 778.211, 778.213. This includes, for example, hourly pay, nondiscretionary bonuses and incentive pay, commissions, piece-rate earnings, shift differentials, and other items. Based on the holding, the quarterly incentive payments to the bartender who filed the Ferra case had to be incorporated into the premiums paid. (The regular rate of pay is discussed in detail in Sections 8.12 – 8.13 of the Wage and Hour Manual for California Employers, by Richard J, Simmons of Sheppard Mullin Richter and Hampton. The new, 24th edition of the Manual is now at the printer and will be available soon.)

3. The Decision Is Retroactive

Even though it recognized that the lower courts in the Ferra case and several federal courts had construed the same language to reach the opposite conclusion, the Supreme Court declined to limit its ruling to prospective application. It is thus retroactive. It is likely to result in a wave of new lawsuits, including class actions. Employers should immediately contact their legal counsel to examine the impact of the Ferra decision on their past and future practices.

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