Since 2000, California has had a requirement that employers pay a one-hour penalty for employees who are not provided compliant meal or rest periods. The law (California Labor Code 226.7), states that this payment is measured as “one hour of pay at the employee’s regular rate of compensation”; however, “regular rate of compensation” is not defined by the Labor Code or the Industrial Welfare Commission (IWC) Wage Orders. Due to the lack of definition of “regular rate of compensation,” it was uncertain whether an employee’s “regular rate of compensation” meant the regular hourly rate of pay, or whether it has the same meaning as “regular rate of pay” for which the employer must rely on when calculating overtime pay which requires, in addition to, the employee’s hourly rate, all forms of compensation (i.e., non-discretionary bonuses) to be included in the calculation. Lacking a clear definition, many employers have paid the penalty payment at the employee’s regular hourly rate without taking into account other forms of compensation. A recent Court ruling provides clarity for employers.
Court Ruling on “Regular Rate of Compensation.” On July 15, 2021, the California Supreme Court ruled in Ferra v. Loews Hollywood Hotel, LLC that employers must use the “regular rate of pay” rather than the hourly wage rate when paying employees for non-compliant meal and rest periods. The plaintiff, a hotel bartender, brought a class action against the employer for allegedly underpaying penalties for missed meal or rest periods under California law. The crux of her claim was that in calculating the hourly rate for the penalties, the employer only considered her hourly rate and did not consider other forms of compensation, such as incentive pay. The Court’s decision clarifies that “regular rate of compensation” means the regular rate of pay and not the employee’s base hourly rate. As such, California employers must pay employees for non-compliant meal and rest periods in accordance with this principle.
It should also be noted that the Court applied this ruling retroactively which may have implications for past penalty payments which were not paid using the employee’s regular rate of pay.
Regular Rate of Pay. An employee’s regular rate of pay is equal to their entire compensation for a workweek divided by the number of hours the employee works during that workweek. It includes hourly earnings, salary, piecework, bonuses, shift premiums or differentials, and commissions. Because an employee’s entire compensation is factored into determining the “regular rate”, an employee’s regular rate of pay will be higher than the employee’s hourly wage rate.
Next Steps for Employers
Employers subject to IWC Wage Orders should adjust their timekeeping and payroll policies and procedures to ensure non-compliant meal and rest breaks are paid at the employee’s regular rate of pay. Employers should consult with legal counsel to determine whether back payments to impacted employees are necessary and to develop a communication strategy around curing any errors.