Premium Payments Calculated Like Overtime, California Supreme Court Says—and Retroactively

Employment Law


California employers must include nondiscretionary payments made to employees when making premium payments for missing meal or rest periods, the state’s highest court has ruled in a decision with retroactive application.

A bartender at Loews Hollywood Hotel, Jessica Ferra was paid on an hourly basis and also received quarterly nondiscretionary incentive payments.

During Ferra’s time at Loews, hourly employees who were not provided with a compliant meal or rest period were paid an additional hour of pay at their hourly wage—Loews did not factor in nondiscretionary payments as part of that calculation.

Ferra filed a class action suit against Loews in 2015. She alleged that by omitting nondiscretionary incentive payments from its calculation of premium pay, Loews failed to pay her for noncompliant meal or rest breaks.

A trial court granted summary judgment in favor of the employer, and an appellate panel affirmed.

But the California Supreme Court reversed.

Pursuant to Section 510 of the Labor Code, employers must provide employees with overtime pay when they work more than a certain amount of time. To calculate overtime pay, Section 510(a) requires an employer to compensate an employee by a multiple of the employee’s “regular rate of pay,” which includes not only hourly wages but all nondiscretionary payments.

California law also provides for meal, rest and recovery periods. If an employer does not provide an employee with a compliant meal, rest or recovery period, Section 226.7(c) requires the employer to “pay the employee one additional hour of pay at the employee’s regular rate of compensation.”

Loews told the court that the use of the “regular rate of compensation” in Section 226.7(c) has a different meaning than the “regular rate of pay” as found in Section 510(a), so that employers are not required to include nondiscretionary payments in the calculation.

The California Supreme Court disagreed.

“We hold that the terms are synonymous: ‘regular rate of compensation’ under 226.7(c), like ‘regular rate of pay’ under section 510(a), encompasses all nondiscretionary payments, not just hourly wages,” Justice Goodwin H. Liu wrote for the unanimous court.

The court reached this conclusion by liberally construing the Labor Code to favor the protection of employees and considering the “essential” historical backdrop to the adoption of Section 226.7(c).

When enacted in 2000, Section 226.7(c) was written in the context of decades of federal law defining overtime pay in terms of an employee’s “regular rate” and state law defining “regular rate of pay” to include nondiscretionary pay, the court explained.

“[H]istory shows that the term ‘regular rate’ in section 7(a) of the [Fair Labor Standards Act (FLSA)] accounts for not only hourly wages but also nondiscretionary payments and that the term ‘regular rate of pay’ as used in section 510(a) and in … earlier wage orders has the same meaning as ‘regular rate’ in the FLSA,” the court stated.

Turning to the phrase “regular rate of compensation” in the context of premium pay for a noncompliant meal, rest or recovery period, the court found that it first appeared when the Industrial Wage Commission (IWC) rewrote its wage orders in 1999.

Although the IWC used a different turn of phrase, it “understood its approach to premium pay for meal or rest break violations to be analogous to its approach to overtime pay.” In an effort to track the wage order, the legislature then used the same phrase when it adopted Section 226.7(a) in 2000.

Loews argued that because “regular rate of pay” was an established term of art in the context of California overtime law, it was significant that the IWC and the legislature used a different term.

But the court disagreed, noting that courts and federal authorities have “consistently understood the term ‘regular rate of pay’ to have the same meaning as ‘regular rate’ in the FLSA,” and that neither the adoption history of the phrase “regular rate of compensation” nor the provisions in which it appears “contain any hint that the legislature or the IWC intended it to mean something different than ‘regular rate of pay’ or specifically to mean an employee’s hourly rate only,” Justice Liu wrote.

In addition, if it were to adopt Loews’ interpretation, “employers would be incentivized to minimize employees’ base hourly rates and shift pay elsewhere, thereby harming employees who are paid in some form other than a base hourly rate,” the court noted.

Having reached the conclusion that “regular rate of compensation” in Section 226.7(c) has the same meaning as “regular rate of pay” in Section 510(a), encompassing not only hourly wages but all nondiscretionary payments for work performed by employees, the court stated that its decision applied retroactively.

Judicial decisions apply retroactively as a general rule, the court observed, and the opinion neither overruled nor disapproved any prior holding, meaning Loews could not claim reasonable reliance on settled law.

Nor was the court persuaded by Loews’ argument that the decision would have a “substantive effect” that could expose employers to significant liability.

“Loews cites no evidence that retroactive application of our holding will expose employers to ‘millions’ in liability, and even if Loews were correct, it is not clear why we should favor the interest of employers in avoiding ‘millions’ in liability over the interest of employees in obtaining the ‘millions’ owed to them under the law,” Justice Liu wrote.

The court reversed summary judgment in favor of the employer and remanded for further proceedings.

To read the opinion in Ferra v. Loews Hollywood Hotel, LLC, click here.

Why it matters: California employers should familiarize themselves with the decision and update their payment systems accordingly, factoring in any nondiscretionary payments in addition to hourly wages when making premium payments to workers for missed meal, rest or recovery periods. Given the retroactive application of the opinion, employers should also brace themselves for potential litigation by employees seeking to recover adjusted payments.

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