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.
Details
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.[1] Specifically, under the RROP concept, employers must include commissions and other non-discretionary payments when calculating overtime pay for employees.[2]
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.
[1] 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.
[2] 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’s Piece-Rate Compensation Law Survives Court Challenge
On January 4, 2019, the California Court of Appeal rejected a request to declare the state’s piece-rate compensation law unconstitutionally vague. The 2016 law, codified as Section 226.2 of the California Labor Code, requires employers to compensate piece-rate employees separately for so-called “nonproductive” work time that is not directly related to the activity being compensated on a piece-rate basis.
The statute requires separate compensation for rest and recovery periods mandated by state law, as well as “other nonproductive time.” Nisei Farmers League brought suit seeking to have the statute declared unconstitutional, arguing the phrase “other nonproductive time” is unconstitutionally vague because it doesn’t say whether such activities as “traveling between work sites, attending meetings, doing warm-up calisthenics, putting on protective gear, sharpening tools, waiting for additional equipment, or waiting for weather to change” are “nonproductive” time within the meaning of the statute. The Court of Appeal rejected the argument, finding the phrase in question was expressly defined by the statute as time under the employer’s control not directly related to the activity being compensated on a piece-rate basis, and there was no constitutional requirement to define precisely what activities fall within the definition.
The 2016 legislation is a codification of earlier appellate court decisions holding that piece-rate workers must be separately compensated for rest breaks. A February 2017 appellate decision reached a similar conclusion as to the nonproductive work time of employees classified as exempt from overtime under the commissioned employee (a/k/a “inside sales”) exemption. (Employees classified as exempt under the “outside sales” exemption are not subject to minimum wage, overtime, or meal/rest break requirements.) All employers with piece-rate and/or inside commissioned sales employees in California should take immediate steps to ensure they separately compensate these employees for all rest breaks and other nonproductive time.
The case is Nisei Farmers League v. California Labor & Workforce Development Agency, No. F075102 (Cal. App. January 4, 2019.)
Aaron Buckley
Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
California Supreme Court Decides Brinker Case, Clarifying Requirements for Meal Periods and Rest Breaks
This morning the California Supreme Court issued its long-awaited opinion in Brinker Restaurant Corporation v. Superior Court (Hohnbaum), holding that an employer’s obligation with respect to meal periods is to relieve an employee of all duty, but does not include prohibiting an employee from working. A copy of the court’s opinion can be downloaded here.
The main issue in Brinker was the nature of an employer’s obligation to “provide” a meal period as set forth in Industrial Welfare Commission (IWC) Wage Order No. 5 and Labor Code section 512. The plaintiff, Adam Hohnbaum, argued that an employer is obligated to “ensure” that an employee takes a thirty-minute, uninterrupted meal period for each shift that exceeds five hours. Defendant Brinker contended that an employer is obligated only to “make available” these meal periods, but need not prohibit an employee from working.
The California Supreme Court agreed with Brinker, holding that an employer’s duty with respect to meal periods is satisfied if the employer relieves its employees of all duty, relinquishes control over their activities, permits them a reasonable opportunity to take an uninterrupted 30-minute break, and does not impede or discourage them from doing so. The court further explained that an employer is not obligated to police meal periods and ensure that employees perform no work, and that an employee’s voluntary choice to work during a meal period does not constitute a violation by the employer of its obligations.
In addition to adopting the “make available” standard, the court also addressed the timing of meal periods, rejecting Hohnbaum’s argument that an employer must provide a second meal period within five hours of the first meal period. In declining to adopt the so-called “rolling five” rule, the court explained that under both the wage orders and the Labor Code, an employer’s obligation is simply to provide a first meal period after no more than five hours of work, and a second meal period after no more than 10 hours of work, and that there are no other meal period timing requirements.
The court also addressed the timing of rest breaks, holding that, while an employer must, “insofar as practicable,” authorize and permit rest breaks in the middle of each work period of four hours “or major fraction thereof” (generally meaning work periods that exceed two hours, except in situations where the entire shift does not exceed 3.5 hours) the employer may deviate from that preferred timing where it is not feasible due to practical considerations. The court rejected Hohnbaum’s argument that employers must always permit their employees a rest break before any meal period.
In addition to addressing the scope of an employer’s obligations to provide meal periods and rest breaks, the court also discussed at length the standards that trial courts must follow when deciding whether to certify meal period and rest break classes. Although we will not discuss those portions of the opinion here, practitioners who handle wage and hour claims will no doubt want to familiarize themselves with them.
This ruling provides welcome relief to California employers. Employers are cautioned, however, that this decision is unlikely to bring an end to meal period litigation. As Justice Werdegar emphasized in his concurring opinion, meal period cases may still proceed as class actions when there is sufficient evidence of a common practice of failing to make meal periods available. The concurring opinion states that when time records show that no meal period was taken, the burden will be on the employer to prove that it relieved the employee of all duty, and that the employee’s choice to continue working was truly voluntary.
This is a good time for California employers to review their policies and practices with respect to both meal periods and rest breaks. Specifically, employers should ensure both that they are providing all required breaks, and that employees are aware of their right to take them. Employers should also be prepared to prove that they have authorized and permitted employees to take breaks in the event that an employee claims otherwise.
Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
wagehourdefense.wordpress.com 