California Supreme Court: One Hour California Meal and Rest Period Penalty Must Include Commissions and Non-Discretionary Bonuses
by Corrie Klekowski and Fred Plevin
Paul, Plevin, Sullivan & Connaughton
On Thursday, the California Supreme Court issued its decision in Ferra v. Loews Hollywood Hotel, LLC, in which it ruled that the one hour of pay employers are required to provide employees for non-compliance with California’s meal and rest period requirements must be based on the same “regular rate of pay” (RROP) calculation used in calculating overtime pay. This means that employers must account for commissions and non-discretionary bonuses when calculating the amount of a meal or rest period penalty paid to employees.
The Court ruled that its decision applies retroactively, so employers may be liable for underpaying hourly employees who received a meal or rest period penalty in a workweek for which they received commissions or non-discretionary payments if the meal/rest period penalty was not based on the RROP calculation.
Jessica Ferra was a bartender at the Loews Hollywood Hotel. She received quarterly incentive payments. On occasion, Loews paid her a penalty of one hour of pay for a missed, late or short meal or rest period. Loews calculated the one-hour meal/rest period penalty at Ferra’s base hourly rate. Ferra filed a class action against Loews in 2015, alleging that Loews failed to comply with California law by omitting the incentive payments from the one hour premium pay she received for noncompliant meal or rest breaks.
The governing statute, Labor Code 227.6(c), specifies that “the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each workday that the meal or rest or recovery period is not provided.” Ferra argued that “regular rate of compensation” was the same as “regular rate of pay,” which is a well-known concept in wage and hour law used for calculating overtime pay. Specifically, under the RROP concept, employers must include commissions and other non-discretionary payments when calculating overtime pay for employees.
Both the trial court and the California Court of Appeal ruled in favor of Loews, holding that the because the Legislature did not use the term “regular rate of pay” in the statute, that concept did not apply to the meal/rest period pay. The Supreme Court, however, disagreed and held that “regular rate of compensation” (the term used in Section 226.7) and “regular rate of pay” were synonymous. In reaching this conclusion, the Court turned aside Loews’ reliance on accepted “canons” of statutory interpretation, characterizing them as “merely aids” and “guidelines subject to exceptions.” The Court also relied on the “remedial purpose” of California’s Labor Code and its guidance that California’s labor laws are to be “liberally construed in favor of worker protection.”
Finally, the Court rejected Loews’ argument that its decision should apply only prospectively. Loews argued that it, like many other employers, had reasonably interpreted Section 227.6 as allowing for the premium pay to be based on an employee’s straight hourly rate and applying the decision retroactively would be unfair. The Court disagreed, concluding that this was a case of statutory interpretation, and therefore, its ruling should be retroactive. It also rejected Loews’ pleas that retroactive application of the Court’s decision would expose employers to “millions” in liability, observing it was “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.”
What This Means
Like Loews, many California employers have paid meal/rest period penalties based on employees’ straight time hourly rate. The Loews decision means that such employers may have liability to employees who received a non-discretionary payment in the same workweek as they received meal/rest period premium pay. The period of exposure could be up to four years under California’s unfair business practice statute. Because the incremental difference in the penalties is likely to be small, the total wages owed, even to a large number of employees, may be relatively minor. However, the liability could expose employers to class action and PAGA claims for attorneys’ fees and other statutory and civil penalties based on an underlying violation of Section 226.7. We expect to see a proliferation of these claims being filed or added to pending class actions and PAGA lawsuits.
Employers should immediately implement changes to ensure that any meal/rest period penalties paid in the future are calculated based on the employee’s RROP.
In addition, employers may want to analyze options for paying employees to address recalculations of past meal/rest period penalties based on the RROP. Whether this is a viable option for employers will depend on a number of factors, including the availability of the information needed to identify eligible employees and to calculate the amount owed. If you have questions about this decision or would like guidance on analyzing your options, please feel free to contact one of the authors or any PPSC attorney.
 Calculating the RROP can be complicated. But, generally for hourly employees, the RROP for a workweek is calculated by determining the total regular pay—including regular wages and other forms of “remuneration”—divided by the total number of hours worked. For example, an employee with a pay rate of $15 per hour that worked 40 hours, and received a $20 production bonus, would have a $15.50 RROP:
|(40 hours x $15/hr) + $20||$620|
|————————————–||=||————-||=||$15.50/hr (correct regular rate)|
|40 hours||40 hours|
So, if this employee had a non-compliant meal period in this workweek, under the Loews decision, they should be paid a $15.50 penalty, not a $15.00 penalty. Where an employee works overtime in the same period that the meal premium is due, the formula would be even more complex.
 The term “non-discretionary” for purposes of the RROP rule is defined in state and federal regulations and administrative guidance. Simply stated, a payment is “discretionary” only if both the fact that the payment is to be made and the amount of the payment are determined at the sole discretion of the employer, and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.
California Court: It’s Okay for Employees to Remain On-Call During Rest Breaks
On January 29, 2015, a California appellate court modified and published its earlier opinion holding that ten minute rest breaks are not invalidated by the mere possibility the employee(s) may be asked to perform work. While actual work is prohibited during rest breaks, simply remaining available to work is not. The case is Augustus v. ABM Security Services, Inc.
ABM Security Services employs thousands of security guards throughout California. The company’s rest break policy requires security guards to keep their radios and pagers on during rest breaks and to respond to emergency and non-emergency situations should the need arise.
Three security guards filed putative class actions against ABM in which they argued the requirement to stay in contact and to respond to requests for assistance rendered the rest breaks indistinguishable from normal security work, and therefore invalid as a matter of law. The trial court certified the class. The plaintiffs then moved for summary adjudication, offering no evidence that any rest periods had ever been interrupted, but arguing the requirement to remain on call during rest breaks rendered them invalid. The trial court granted the motion, finding the requirement to remain on call during rest breaks meant the security guards were not truly on break, regardless of whether they were actually interrupted and required to perform work. The court awarded $90 million in damages, penalties and interest to the security guards, plus over $31 million in attorneys’ fees.
The appellate court examined Wage Order No. 4 and Labor Code section 226.7 in an effort to determine “the nature of a rest period.” The court found no useful guidance in the wage order, but noted that section 226.7 merely prohibits requiring an employee “to work” during a rest break. The court framed the issue as “whether simply being on-call constitutes performing ‘work.’ We conclude it does not.”
The court rejected the guards’ argument that on-call time necessarily constitutes work because it is indistinguishable from the rest of a guard’s work day, given that guards are always on call. The court explained: “[S]ection 226.7 does not require that a rest period be distinguishable from the remainder of the workday, it requires only that an employee not be required ‘to work’ during breaks. Even if an employee did nothing but remain on call all day, being equally idle on a rest break does not constitute working.”
The court also rejected the guards’ reliance on case law holding that employees must be relieved of all duty during meal breaks, noting the wage order includes language specifically requiring an employer to relieve an employee of all duty during a meal break, but contains no such requirement with respect to rest breaks. The court concluded: “In sum, although on-call hours constitute ‘hours worked,’ remaining available to work is not the same as performing work. . . . Section 226.7 proscribes only work on a rest break.”
This decision clarifies important distinctions between meal break and rest break requirements, and in the process provides guidance to employers on what they must do to comply.
Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
Supreme Court to Decide if Offer of Judgment Moots Collective Action
The Supreme Court has agreed to decide whether a defendant in a Fair Labor Standards Act case can avoid a collective action by offering full relief to the plaintiff before other employees join the case.
The practice in FLSA cases is for plaintiffs’ lawyers to file a lawsuit on behalf of the original named plaintiff, and then seek to expand the case into a collective action by issuing notices of right to opt-in to other similarly situated employees. To avoid the prospect of a collective action, employers sometimes choose to make an offer of full relief to the named plaintiff early in the case. They then argue that the case should be dismissed as moot, leaving no pending lawsuit for other employees to join.
This approach has received a mixed reception in the federal courts of appeals. The Ninth and Eleventh Circuits held that a case should be dismissed when the named plaintiffs’ claims have been resolved. The Third and Fifth Circuits have held that a collective action, like a class action under a Rule 23, takes on a life of its own when the case is filed and does not become moot when the named plaintiff’s claim is resolved. The arguments involve some arcane issues involving the distinction between collective actions and class actions and the “case or controversy” requirement under Article III of the Constitution.
In the case that the Supreme Court agreed to hear, the defendant company operates over 200 nursing homes and other facilities. The plaintiff worked for one of those homes for only several months. She filed suit claiming that the company violated the FLSA by making automatic deductions for meal breaks. To make the case go away quickly, the company responded to the court complaint by making an offer of judgment for $7,500 in alleged unpaid wages and liquidated damages, plus attorneys’ fees, costs and expenses. The district court granted the company’s motion to dismiss the case as moot, but the Third Circuit reversed, holding that the company could not preempt a collective action by “picking off” the named plaintiff.
The Supreme Court will hear oral argument in the case, Genesis Healthcare Corporation v. Symczyk, in its term starting October 2012.