California Supreme Court: Regular Rate of Compensation for Meal and Rest Period Penalties Includes Non-Discretionary Incentive Payments

In an employee-friendly decision, the California Supreme Court on July 15, 2021, reversed a California Court of Appeal ruling that previously held the meal and rest period premium penalty does not take into account non-discretionary incentive payments, such as bonuses, into the regular rate for purposes of calculating the premium penalty payment. As a result, California employers could pay employees their normal base hourly rate for the penalty and not recalculate that hourly rate to take into account any non-discretionary incentive payments. This is not the case anymore as a result of the California Supreme Court’s ruling.

In Ferra v. Loews Hollywood Hotel, LLC, Loews paid Ms. Ferra, a bartender for the company, quarterly non-discretionary incentive payments but did not include those incentive payments into her base hourly rate when paying meal and rest period penalties. She filed a class-action lawsuit arguing that non-discretionary incentive payments should be included in the regular rate of compensation for purposes of paying meal and rest break premiums.

The California Supreme Court was faced with reconciling regular rate of compensation for purposes of calculating the meal or rest period premium and regular rate of pay for purposes of calculating overtime. If an employer fails to provide a compliant meal or rest period for a non-exempt employee, California Labor Code 226.7(c) requires the employer to “pay the employee one additional hour of pay at the employee’s regular rate of compensation.” California Labor Code 510(a) requires an employer to take into account non-discretionary payments (such as bonuses) to calculate the employee’s regular rate of pay for purposes of calculating overtime.

In holding that the regular rate of compensation and regular rate of pay are synonymous, the California Supreme Court considered the legislative and judicial history, public policy, and administrative agency guidance to conclude there is “no evidence that ‘regular rate of compensation’ means hourly wages only.”

To add more sting to the burn for employers, the California Supreme Court further held that this ruling is retroactive, meaning this will apply to previous meal and rest period penalty practices. California employers should consult with their employment counsel to review their meal and rest period practices and address and possibly correct previous premium pay penalties that did not take into account non-discretionary incentive payments. Employers Council members can contact our California licensed attorneys at CAInfo@employerscouncil.org.