First, a reminder on when you must pay meal and rest period penalties: In California, non-exempt employees may be entitled to meal and rest break penalties under varying circumstances, in the form of one hour of pay per violation. For example,
- Non-exempt employees must receive a thirty (30) minute meal break if they work more than five (5) hours in a day, and that meal break must be provided before the end of the fifth hour of work (i.e., within the first 5 hours of the workday). Be careful: this means the employee must both be provided a full 30-minute uninterrupted meal and also that the meal must be initiated by the end of hour 5 of their work day (in other words by 5:00 hours worked). Employees who work more than ten (10) hours in a day are entitled to a second such 30-minute meal break. Meal periods can be unpaid, and employees must clock out and in for their duty-free meal breaks. Failure to provide a timely, sufficiently long or uninterrupted meal period could result in a meal period penalty equal to one hour of pay.
- Paid rest breaks of at least ten (10) minutes are required for non-exempt employees who work three and a half (3 1/2) or more hours in a day, for every four (4) hours of work (or a substantial fraction thereof, which means 2 or more hours) in a work day. The failure to authorize and permit compliant rest breaks results in a penalty of one hour of pay.
Next, how do you calculate this one hour of premium pay? How to calculate this one hour penalty has been the source of debate and is the topic of yesterday's California Supreme Court's decision.
Some employers have calculated this penalty based on the employee's base hourly rate – that is, the employee receives a penalty payment equal to one hour of straight time, exclusive of the value of bonuses, commissions and the like. The California courts have been wrestling over whether this penalty should instead be paid at the “regular” rate of pay, which includes the value of non-discretionary bonuses, piece work earnings, commissions and other types of pay as required by law. “Regular rate of pay” should be a familiar concept, as employers are required to pay non-exempt employees’ overtime, paid sick leave, and reporting time pay at their regular rate of pay, instead of their “hourly” rate of pay. With regard to meal and rest break premiums, by comparison, the confusion stems from the language of the penalty statute, which requires that the penalty be calculated at the "regular rate of compensation."
Yesterday, in Ferra v. Loews Hollywood Hotel, LLC, the California Supreme Court overturned the most recent appellate court decision on this subject. Specifically, in an earlier decision the California Court of Appeal (mistakenly) held that meal and rest break remedies must be paid at the base hourly rate because the “regular rate of compensation” in the meal and rest premium context must have a different meaning from “regular rate of pay.” The California Supreme Court disagreed: “regular rate of pay” and “regular rate of compensation” now are synonymous.
What does this mean to you? As clarified by the California Supreme Court, employers must pay meal and rest break premiums at the employee’s regular rate of pay—similar to overtime, sick leave, and reporting time pay.
And as if that were not enough, the Supreme Court ruled that its decision in Ferra applies retroactively, not just going forward.
The Ferra Court’s decision is a significant result for all employers, and a particularly unfortunate blow to employers who sought to do the “right thing” by proactively paying meal and rest break premiums where they might not be required and using the wrong (lower) pay rate. We are concerned there may be a wave of class and related litigation coming against California companies that have been issuing meal and rest premiums based on hourly rates of pay.
What can you do today to protect yourself? Consider the following next steps:
- Review your current practices. Effective immediately if you are paying rest or meal periods at the employee's base hourly rate, correct this to pay the penalty at the regular rate of pay. If you use a payroll company, double check that they have made this change on your behalf.
- Audit past meal and rest break premium payments to understand where you may have risk or liability. Let us know if you want help doing this, we may be able to make the process less overwhelming for you. With this information, you can make decisions on what to do about any past errors you identify.
- Immediately modify your pay stubs to reflect the accurate rate at which meal or rest penalties are paid.
- Consider auditing the consequences of the "retroactive" application of the law with respect to potential underpayments. For instance, you may want to retroactive pay adjustments. In California, the statute of limitations for claims for unpaid wage is four years. We can help you make decisions on this, let us know if you want to chat.
- Now, more than ever, consider reviewing your meal and rest period policies and practices, reinforcing your policies consistently and regularly, and adopting a policy and practice of asking non-exempt employees to confirm every pay period - preferably in writing - that (1) they have been provided their legally-mandated meal and rest periods; (2) in the event they missed or took a late or short meal or rest period they did so voluntarily, if true; and (3) they understand that they are required to accurately record all minutes of work and to immediately report any non-compliant meal or rest periods to the company. We can help you get these protective policies and practices in place.
Protect yourself from the ripple effect: As often is the case, this decision may have implications for other pay-related obligations under California laws. We are here for you: we can help you look more globally at your pay practices to identify areas of risk and/or make suggestions for greater protection from liability.