In a decision anxiously awaited by employers, the California Supreme Court ruled, on July 15, 2021, that the correct rate for paying meal and rest period premiums is one additional hour of pay at an employee’s “regular rate of pay,” which is the same method used for calculating overtime wages. The decision in Ferra v. Loews Hollywood, LLC overturned a contrary decision by a California state appellate court which held that the additional hour of pay could be paid at the employee’s straight hourly rate.

What does this mean for employers?

Under California law, an employer that fails to timely provide duty-free meal periods or authorize and permit duty-free rest periods must pay an employee one additional hour of pay at the employee’s “regular rate of compensation” for each workday the premium is owed.  The question of how to calculate the additional hour of pay has now been conclusively resolved by the California Supreme Court.  Employers must include all non-discretionary payments such as bonuses, commissions, shift differentials or other non-discretionary incentive pay in calculating the additional hour of pay for meal and rest period premium payments.  For example, if an employee earns $15 per hour, earns $1,000 in non-discretionary bonuses and works 40 hours in a single workweek, the calculation of the additional hour of premium pay is as follows:

• Total regular wages owed = 40 hours x $15.00 = $600.00
• Total compensation for the workweek = $1,000 bonus + $600 = $1,600
• Hourly rate for premium pay for missed meal period = $1,600/40 hours = $40.00

Accordingly, instead of paying the employee $15 for failing to provide a meal period, an employer is required to pay $40 to the employee in this example.

Is the California Supreme Court’s decision retroactive?

Yes. The California Supreme Court unequivocally held that the decision applies retroactively.  That means that employers face potential liability for previously underpaying meal and rest period premium pay for up to four years under California law.

What should employers do now?

Given the proliferation of wage and hour litigation in California, employers can expect to see an increase in the number of class and Private Attorney General Act (PAGA) representative actions filed in court in the wake of this decision.  Employers should review existing meal and rest period policies to ensure they are fully compliant with California law and remove any references to the calculation of premium pay at an employee’s straight hourly rate.  When issuing premium payments to employees for non-compliant meal and rest periods, employers need to adjust payroll practices and include all non-discretionary payments in the calculation of the additional hour of pay.  Employers concerned about potential liability for past underpayments should consult with experienced employment counsel regarding options for strategically mitigating such liability.

If you need further information, please contact Marie Burke Kenny or any other member of our Labor and Employment team.