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 Agency Issues New Guidance Stating Employers May Not Require Employees to Remain On-Site During Rest Breaks
California’s Division of Labor Standards Enforcement (DLSE) recently updated its guidance on paid 10-minute rest breaks. In its new guidance the DLSE maintains, for the first time, that an employer may not require its employees to remain on the employer’s premises during rest breaks.
In November 2017 the DLSE posted on its website new Frequently Asked Questions (FAQs) addressing requirements for rest breaks and lactation accommodation. That new guidance includes the following:
5. Q. Can my employer require that I stay on the work premises during my rest period?
A: No, your employer cannot impose any restraints not inherent in the rest period requirement itself. In Augustus v. ABM Security Services, Inc., (2016) 5 [sic] Cal.5th 257, 269, the California Supreme Court held that the rest period requirement “obligates employers to permit—and authorizes employees to take—off-duty rest periods. That is, during rest periods employers must relieve employees of all duties and relinquish control over how employees spend their time.” (citation omitted) As a practical matter, however, if an employee is provided a ten minute rest period, the employee can only travel five minutes from a work post before heading back to return in time.
The new DLSE FAQs in their entirety can be found here. In the Augustus v. ABM Security Services case cited by the DLSE, the California Supreme Court held that employees cannot be required to remain on-call during rest breaks, but did not expressly say employers must allow their employees to leave the employer’s premises during rest breaks. For more information on the Augustus case see our December 27, 2016 blog post.
Prior to the DLSE’s new FAQs, it was widely understood that employers may require their employees to remain on-site during rest breaks. While the DLSE has no authority to make law, it is empowered to enforce California wage orders and labor statutes, and courts often find the DLSE’s opinions on enforcement issues persuasive. For this reason California employers should take the DLSE’s new guidance seriously.
As the DLSE pointed out in its new FAQs, the realities of time and distance are likely to discourage many employees from leaving their employer’s premises during 10-minute rest breaks, even when allowed to do so. However, an employer’s policy that purports to prohibit employees from leaving the employer’s premises during rest breaks could, under the DLSE’s new interpretation, potentially support a conclusion that the employer failed to relieve its employees of all duty during rest breaks, and subject the employer to liability. California employers should therefore review their policies and practices to ensure they are not requiring employees to remain on the employer’s premises during rest breaks.
California Supreme Court: Employees Cannot Be Required to Remain On-Call During Rest Breaks
Last week the California Supreme Court issued a decision holding that employers cannot require employees to remain “on-call” during legally required rest breaks. The ruling reversed a January 2015 appellate court decision.
California law has long required employers to provide most employees with a paid, uninterrupted 10-minute rest break for every work period of four hours or major fraction thereof, during which employees may not be required to work. California also requires employers to provide most employees with unpaid, uninterrupted 30-minute meal periods for work periods exceeding five hours, during which employees must be relieved of all duty.
Three security guards filed putative class actions against their employer, ABM Security Services, Inc., claiming the rest breaks provided to them were rendered invalid by ABM’s requirement that they keep their radios and pagers on, remain vigilant, and respond to calls if necessary. ABM argued that the mere requirement to stay “on-call” did not render the rest breaks invalid. The trial court agreed with the security guards and awarded $89.7 million in damages to a class of more than 14,000 security guards. ABM appealed.
The Court of Appeal analyzed the issue by turning to Industrial Welfare Commission Wage Order 4, which governs the working conditions of ABM’s security guards. Although Wage Order 4 requires employees to be “relieved of all duty” during meal periods, it contains no similar language as to rest periods. The absence of any explicit language requiring employees to be relieved of all duty during rest periods led the Court of Appeal to conclude that no such requirement was intended.
A divided California Supreme Court disagreed, holding that a “rest period” means just that―a period of rest in which an employee must be relieved of all duties. The court noted its interpretation is consistent with Labor Code section 226.7, which prohibits employers from requiring “any employee to work during any meal or rest period . . . .” In other words, the court determined an employer’s responsibilities are the same for meal and rest periods: to relieve employees of all work. Therefore, the court held that state law requires employers to relieve employees of all work-related duties during a required rest break, including the duty to remain on-call.
The practical effect of the decision is that employees must be allowed to turn off radios and mobile phones during rest breaks because requiring an employee to leave them on would mean the employee is on-call and available for work.
Keep in mind the court did not hold that rest periods may never be interrupted; it simply said employees cannot be required to remain on-call or readily available for interruption. If a rest break is interrupted or not provided, the employer must either provide a new, uninterrupted rest period within the required time frame, or pay the employee a penalty equal to one hour of pay at the employee’s regular rate.
The court did not disturb the longstanding rule that employees may be required to remain onsite or nearby during rest breaks.
Employers should immediately review their policies and practices to ensure they are not requiring California employees to remain on-call or in contact during rest breaks. This means employees must be allowed to turn off radios, mobile phones and other communication devices.
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