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California Supreme Court Holds That Meal-Period, Rest-Period, And Recovery Premiums Must Include Nondiscretionary Earnings

By Swerdlow Florence Sanchez Swerdlow & Wimmer

July 21, 2021

On July 15, 2021, the California Supreme Court held that the calculation of premium pay for noncompliant meal, rest, and recovery periods must include not only the employee’s hourly rate of pay but also all other nondiscretionary payments for work performed by the employee.  The decision, Ferra v. Loews Hollywood Hotel, LLC, represents a significant reversal from the lower courts and aligns the calculation for meal, rest, and recovery premium pay with the calculation for overtime pay.

Under California law, employers must provide overtime pay when an employee works more than a certain amount of time. To calculate overtime pay, California Labor Code Section 510(a) requires an employer to compensate an employee by a multiple of the employee’s “regular rate of pay.” California courts have long held that the regular rate of pay includes an employee’s nondiscretionary earnings, such as nondiscretionary bonuses, shift differentials, attendance bonuses, piece-rate earnings, and commissions.  Thus, it has long been settled that an employer must factor these types of earnings into calculating the rate at which employees must be compensated for overtime work.

The question in Ferra was whether the same calculation for determining overtime pay must be applied to determine the premium pay for missed meal, rest, and recovery periods, or whether the employee could simply be paid their hourly rate of pay. Section 226.7(c) of the California Labor Code provides: “If an employer fails to provide an employee a meal or rest or recovery period in accordance with a state law, … the employer shall pay the employee one additional hour of pay at the employees’ regular rate of compensation for each workday that the meal or rest or recovery period is not provided.”  In Ferra, the Court held that the “regular rate of compensation” for determining meal-period, rest-period, and recovery premiums is the same as the “regular rate of pay” for determining overtime pay. Therefore, the Court held that premium pay for missed meal, rest, and recovery periods must encompass all nondiscretionary payments, not just hourly wages.

Of further consequence, the Court held that its decision applies retroactively.  Therefore, employers should consider whether to now make retroactive payments if their 226.7 premium payments were erroneously calculated.  

In light of Ferra, employers in California should review their methods for calculating meal-period, rest-period, and recovery premiums to ensure that all nondiscretionary earnings are factored into such premiums, just as should be done for overtime.  For example, employers must account for employees’ shift differentials, attendance bonuses, piece-rate earnings, commission payments, and nondiscretionary bonuses.  

Contact your SFSSW attorney if you have questions regarding how to calculate premium payments for missed meal or rest periods or questions regarding California’s meal and rest period requirements in general.

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