Employers Face Potentially Higher Compensation Obligations for Meal, Rest, and Recovery Breaks

Last week, the California Supreme Court issued a decision of great importance to employers statewide. In Ferra v. Loews Hollywood Hotel, LLC, the court ruled employees must receive premium payments at their “regular rate of pay” for missed meal, rest, and recovery breaks.

This will be news to many employers that, until now, have been compensating employees at their “base hourly rate” alone for meal, rest, and recovery breaks that have been missed. But in the wake of Ferra, employers are now on the hook for what may be a higher amount, as the regular rate of pay includes all non-discretionary payments like bonuses and commissions.

For employers, the ruling is particularly troublesome because it will be applied retroactively. As such, even employers that have acted in good faith by paying premium pay for missed meal, rest, and recovery breaks, albeit at the base hourly rate, will now be exposed to liability.

A Bit of Background

In Ferra, the plaintiff alleged that her employer, Loews Hollywood Hotel, improperly calculated meal and rest period premium payments when it excluded her non-discretionary quarterly incentive bonuses from premium pay calculations. For its part, Loews successfully argued at trial and before the Court of Appeal that Ferra’s regular rate of compensation for meal, rest, and recovery period premium pay was her base hourly rate of pay, which was distinguishable from her overtime regular rate of pay. The California Supreme Court flatly disagreed and concluded that if it were to adopt the interpretation offered by Loews, employers would be incentivized to minimize employees’ base hourly rates and shift pay elsewhere, which would harm employees who are paid in some form other than a base hourly rate.

Employer Takeaways:
The widespread impact of this landmark decision is clear: employers can no longer base meal and rest period premiums on an employee’s base hourly rate alone. Consequently, employers must prepare themselves for an onslaught of class action and Private Attorney General Act (PAGA) claims based on Ferra. They are also encouraged to do all of the following:

  1. Review and update all payroll policies and procedures pertaining to meal, rest, and recovery period premiums. Timekeeping and payroll systems may also need to be updated to ensure that the regular rate of pay is properly calculated, as the meal, rest, and recovery period premiums owed to employees may now vary from pay-period to pay-period depending on the forms of payment made to any given employee.
  2. Given the retroactive application of Ferra, it would be wise to audit prior meal, rest, and recovery period premium payments made to employees who receive non-discretionary payments that are included in their regular rate of pay calculations—this in order to ensure those premiums have been paid accurately.
  3. Employers should note that referring to a payment, such as a bonus, as “discretionary” may not necessarily exempt it from the calculation of an employee’s meal, rest, and recovery period premiums and/or overtime wages.

Of course, if you need any guidance in the aftermath of Ferra or have any other employment- or wage and hour-related questions, do not hesitate to contact the employment law specialists at Michelman & Robinson, LLP.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.