In Ferra v. Loews Hollywood Hotel, the California Supreme Court issued a ruling that in calculating the penalty for not providing a timely or uninterrupted meal break pursuant to Labor Code section 226.7, the one full hour of “regular rate of compensation” is synonymous with “regular rate of pay.” Loews argued that the statutory penalty was the proper compensation rate; the court said “no.” Now, in calculating the statutory penalty, the employer must include all “non-discretionary payments,” including merit bonuses, commissions and average tip splits, in calculating the penalty.
Plaintiff Jessica Ferra filed a complaint against Defendant Loews Hollywood Hotel, LLC on behalf of herself and three alleged classes of hourly Loews employees. Ferra alleged that Loews improperly calculated her premium payment pursuant to California Labor Code section 226.7 when Loews allegedly failed to provide her with her required meal and rest breaks in violation of California Labor Code section 226.7. Section 226.7 as well as Industrial Welfare Commission Wage Orders require meal and rest break premiums to be paid at the employee’s “regular rate of compensation.”
Loews contended that it compensated Ferra and other potential class members with proper meal/rest premiums based on their hourly wage as opposed to the “regular rate of pay.” The “regular rate of pay” is typically viewed in the context of Labor Code section 510, i.e. overtime. Loews ultimately brought and succeeded on a Motion for Summary Judgment based on the argument that under Section 226.7, employees only have to be paid at their base hourly rate and not the “regular rate of pay,” as the terms “regular rate of compensation” and “regular rate of pay” are not synonymous. The California Court of Appeal subsequently affirmed the decision.
However, the California Supreme Court reversed the decision. In a harbinger of the opinion to come, the Court opined that the general principles of the Labor Code were to protect employees. From there, the Court determined that the term “regular rate of compensation” was facially ambiguous and could therefore refer to either straight hourly wages or hourly wages plus nondiscretionary payments (i.e., the “regular rate of pay”). The Court’s decision ultimately focused on the apparent disputed interpretation of these phrases.
Initially focusing on the “regular rate of pay,” the court extensively examined the phrase’s history under both state and federal law. The Court determined that the phrase “regular rate” – excluding “pay” – is the primary modifier and component of Section 510’s intent for “regular rate of pay.” In other words, the Court determined that the “regular rate” is a term of art that would also include all non-discretionary compensation.
After resolving this issue, the Court turned to the “regular rate of compensation.” Similarly, the Court examined the legislative history of Section 226.7 and the Wage Orders and determined that “regular rate of compensation” and “regular rate of pay” were synonymous, which, as Loews unsuccessfully argued, would overturn years of judicial and DLSE interpretation and employer practice. The Court was unmoved.
Critically, the Court rejected Loews’ arguments that the decision should only apply prospectively not retroactively. Unfortunately, the Court again disagreed, and its ruling would apply retroactively – just like Vazquez v. Jan-Pro Franchising International.
Now What? An Employer’s Response Plan
As a result of the Ferra decision, employers may now be liable for additional payments and penalties even if they previously paid employees for meal and rest period premiums. Employers should consider conducting an audit to perform and confirm the proper compensation of meal/rest premiums under Section 226.7. Similarly, timekeeping and payroll practices must be updated to ensure the proper calculation of the “regular rate of pay” is included within the meal/rest penalty as well as having a different value depending on the pay period(s) affected.
Finally, employers should remain cautious that simply characterizing any compensation as “discretionary” may not exonerate the employer from a proper accounting of those funds within the “regular rate of pay.”
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