In California, missed break premiums must be paid at overtime rates

On July 15, 2021, the California Supreme Court ruled that employers must pay employees for missed meal, rest, and recovery breaks at the employee's "regular rate of pay" instead of their base hourly rate. The regular rate of pay is often higher than an employee's base hourly rate because it includes all nondiscretionary incentive payments, including bonuses and commissions. Perhaps most importantly, the court made its decision applicable retroactively—meaning that employers who believed they had been complying with the law by paying premiums at base hourly rates, are now susceptible to significantly increased wage and hour liability.

The case, Ferra v. Loews Hollywood Hotel, LLC, was brought by a former bartender at Loews Hollywood Hotel who earned an hourly wage as well as quarterly nondiscretionary incentive payments. Loews' written employment policies required payment of a premium for any missed meal and rest breaks at the employee's base hourly rate. Loews did not pay this premium at the regular rate of pay (which would have included the nondiscretionary incentive payments). On behalf of a prospective class, Plaintiff argued that missed meal break premiums should have been paid at her regular rate of pay, not simply at her hourly rate.

At issue in the case was language in California Labor Code section 226.7(c), which requires employers to "pay the employee one additional hour of pay at the employee's regular rate of compensation." Until this decision, "regular rate of compensation" was understood by both employers and courts alike to mean the employee's base hourly pay, and not the "regular rate of pay" as used for overtime pay calculations under Labor Code section 510(a). This understanding was supported by the inference, and a canon of statutory interpretation, that had lawmakers intended the terms to mean the same thing, they would have used the same term. The Supreme Court disagreed, finding significance in the use of the words "regular rate" and holding that it must interpret the Labor Code in the way that gives the most protection to employees' working conditions, wages, and hours.

The immediate upshot of this decision is, of course, that employers must immediately begin paying employees missed meal break premium at their "regular rate of pay" rather than their base hourly compensation. The decision's retroactivity, however, makes it even more problematic as employers who had previously paid the premium at employees' hourly base rate, now owe those employees back-pay at the higher rate. Employers may consider providing restitution payments to employees who have received meal break premiums based on their base hourly rate, and even may consider eliminating non-discretionary bonus programs moving forward so as not to increase the regular rate of pay.