On July 15, 2021, the California Supreme Court issued its decision in Ferra v. Loews Hollywood Hotel, LLC, holding that employers must pay premium payments to employees for missed meal, rest, and recovery breaks at the employee’s “regular rate of pay” rather than at their base hourly rate.  This holding aligns the formula for calculating meal period and rest break premium payments with the formula for calculating overtime payments under California law.

The “regular rate of pay” includes all non-discretionary incentive payments, such as bonuses and commissions.  This rate has been used to calculate overtime rates for workers who are paid both a guaranteed hourly rate and performance-based incentive bonuses, or piecework earnings.  The “regular rate of pay” includes all non-discretionary incentive payments. An employee is thus entitled to one and one-half times his or her “regular rate of pay” for time worked more than 8 hours in one day or 40 hours in one week and double his or her regular rate of pay for time worked more than 12 hours in one day.

California law also requires premium payments for meal, rest, and recovery break violations.  Labor Code section 226.7(c) requires employer to “pay the employee one additional hour of pay at the employee’s regular rate of compensation.”  In the Ferra decision, for the first time, the Court interpreted the term “regular rate of compensation” to mean “regular rate of pay” as used in the overtime laws.  Thus, when an employee misses a meal, rest, or recovery break, employers must pay one additional hour of pay which includes all non-discretionary incentive payments the employee received during the same pay period.

Significantly, the Court’s ruling on Friday applies retroactively.  This means the Court created exposure for California employers that acted in good faith trying to comply with the law by paying premium pay at the base hourly rate.  Employers should expect a new wave of class action and Private Attorney General Act (PAGA) claims based on this decision.

Employers should consult with their employment counsel at Hill, Farrer & Burrill regarding how to comply with the new rules and how to address any past inadvertent “underpayments” of premium pay for missed breaks.