On the heels of Donohue v. AMN Services, LLC recognizing a rebuttal presumption of meal period violations based on the employer’s time records alone – as discussed in our prior blog post – the California Supreme Court has, in another blow to employers, ruled that the premium pay required where the employer does not provide meal, rest or recovery periods is not based on the hourly rate of pay (as had previously been understood).  In essence, the California Supreme Court has found that the “rate of compensation” for the purpose of determining the additional hour of pay due to employees who are not provided meal, rest or recovery periods is synonymous with the overtime rate of pay and must include all nondiscretionary payments, not just hourly rates.

As background, Section 226.7(c) of the California Labor Code requires an employer to pay the employee one additional hour of pay at the employee’s “regular rate of compensation” for each workday that the meal or rest period or recovery period (required under Cal/OSHA’s Heat Illness Prevention Standard) is not provided.  Previously, several federal district courts concluded that the “regular rate of compensation” in Section 226.7(c) does not have the same meaning as “regular rate of pay” for overtime purposes and instead means an employee’s base hourly rate only.  But the Supreme Court has just changed that.  In Ferra v. Lowes Hollywood Hotel, LLC, the California Supreme Court has made clear that the “regular rate of compensation” for meal, rest and recovery period violations is the same as the “rate of pay” for overtime purposes.  Notably, the decision is retroactive, meaning that this ruling will apply to an employer’s pay practices stretching years into the past. 

What that means is employers must calculate a potentially higher hourly rate for premium pay that includes consideration of nondiscretionary payments such as production and attendance bonuses, commissions, shift differentials, and payments made in the form of goods or facilities.  This decision will certainly add fuel to the state’s relentless class action and PAGA litigation, with newfound claims that employers have failed to pay for noncompliant breaks by omitting nondiscretionary incentive payments from its calculation of premium pay.  Because the Ferra ruling is retroactive, California employers should, in addition to changing the rate calculation for premium pay going forward, evaluate, with the advice of employment counsel, any exposure from past compensation practices.