Key Point

• Employers must immediately change the manner in which they calculate and pay employee meal period and rest break premiums if they pay those premiums using an employee’s regular hourly rate in any workweek that an employee receives additional non-discretionary earnings.

Introduction

On July 15, 2021, in Ferra v. Loews Hollywood Hotel, LLC, the California Supreme Court reversed the Court of Appeal in a sweeping decision affecting how employers should be calculating the one extra hour of premium pay that employees are owed if an employer fails to provide a compliant meal period or rest break. The Court held that meal and rest premium payments must be calculated in the same manner for calculating overtime payments. In other words, meal period and rest break premiums are not to be paid at the employee’s straight time rate or base hourly rate. Instead, the employer must include and calculate the amount of any non-discretionary income, such as a non-discretionary bonus or shift differential, and use the adjusted “regular rate” for purposes of paying meal period and rest break premiums under Labor Code Section 226.7.

What is most distressing about the Loews decision is that the Court specifically ruled its holding is retroactive.

What Exactly Did the Court Decide?

In the Loews decision, the Court was struggling with the following question:

“Did the Legislature intend the term ‘regular rate of compensation’ in Labor Code section 226.7, which requires employers to pay a wage premium if they fail to provide a legally compliant meal period or rest break, to have the same meaning and require the same calculations as the term ‘regular rate of pay’ under Labor Code section 510(a), which requires employers to pay a wage premium for each overtime hour?”

Unfortunately for employers, the Court ruled that the terms were interchangeable. Thus, when paying a meal or rest premium, an employer must take into account whether the employee received additional non-discretionary income during the workweek in which the employee also was entitled to the premium pay. In those instances, the employer must calculate the rate of pay for the premium pay by including the non-discretionary income before it pays the employee.

What Does the Loews Decision Mean for Employers?

Most employers pay meal period and rest break premiums by using an employee’s hourly rate of pay. In other words, if an employee earns $10.00 per hour and is entitled to an hour of premium pay, the employer typically would have paid $10.00 in premium pay. But now, as a result of the Loews Supreme Court’s decision reversing the Court of Appeal, before an employer pays the premium payment, it must take an additional step and review the employee’s work schedule or payment history for each workweek. If the employee received any additional non-discretionary income in the workweek that they received the premium pay (e.g., bonuses or shift differentials), the employer must include the non-discretionary payments in order to calculate an adjusted “regular rate” – just as employers must do for overtime purposes – for the pay period in which it makes the meal period or rest break premium payment. If the employee did not receive any non-discretionary payments during the workweek in which any meal period or rest break premiums are paid, then the employer could simply use the employee’s base hourly rate of pay.

Note, however, that even though the adjusted “regular rate” is calculated in the same manner as for overtime purposes, the meal period/rest break premium pay is not paid at the overtime rate. The Court did specifically note that its decision does not change any overall defenses that an employer may have for the underlying liability. Employees still must prove that they were entitled to the premiums.

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