Increased Liability for Meal, Rest Premium as Wages

Mon, 07/11/22

On May 23, 2022, the California Supreme Court issued a decision in Naranjo v. Spectrum Security Services, Inc., finding that meal period and rest break premium pay are considered wages.  This is in accordance with the purposes of the California Labor Code’s provisions regarding timely wage payment and wage statements.  As a result, the failure to pay and include meal period and rest break premium pay on wage statements can support additional penalties for wage statement violations under Labor Code Section 226 and waiting time penalties under Labor Code Section 203. 

What We Thought the Law Was

Under California law, employees are entitled to rest breaks and an unpaid meal period.  The number of breaks and periods depended on the number of hours worked but was typically two 10-minute rest breaks and one 30-minute unpaid meal period, per regular, 8-hour shift.

An employer who failed to provide the requisite number or duration of the breaks during each workday was required to pay 1-hour of rest break premium at the employee’s regular rate of pay.  Similarly, an employer who failed to provide the requisite number or duration of meal periods was, similarly, required to pay 1-hour of meal period premium at the employee’s regular rate of pay.  (Note that the California Supreme Court ruled last year in Ferra v. Loews Hollywood Hotel, LLC, that it is not the employee’s base rate of pay, but “regular rate of pay,” which must be calculated out and based upon the employee’s average pay incorporating nondiscretionary bonuses, piece-rate compensation, and shift differential pay.)

Before the decision in Naranjo, it was assumed that employees could not seek derivative penalties on top of the original premium pay.  Rather, the premiums themselves were considered the penalty.  Moreover, the premiums are not for work performed.  As a result, the failure to timely pay and failure to properly designate the premium pay did not entitle an employee to pursue waiting time penalties, under Labor Code, section 203, or wage statement penalties, under Labor Code, section 226.

What Happened in The Case?

Naranjo, the plaintiff, was a security guard employed under Spectrum Security Services.  Upon leaving his post to take his lunch break as per company policy, Spectrum Security unlawfully terminated Naranjo, which was the catalyst for this putative case.  Meal period and rest break violations were filed, as well as derivative claims which violated both wage statement and waiting period laws (Labor Code Sections 203 and 226).

The trial court certified a class action for the meal period, waiting time penalty, and wage statement claims.  At trial, a directed verdict was granted on the meal period claim due to the lack of a written, revocable on-duty meal period agreement.  Relying on a 2007 California Supreme Court decision, the trial court also determined that waiting time penalties and wage statement penalties were potentially applicable.  While the employer was found to be liable for wage statement penalties due to a “knowing and intentional” failure to include meal period premiums on the wage statements, the trial court determined that waiting time penalties were not recoverable because this failure was not “willful.”

Both parties appealed and, while the Second Appellate District of California affirmed the award of meal period premiums, the appellate court held that meal period claims do not entitle employees to pursue derivative waiting time penalties and wage statement penalties.  The appellate court reasoned that meal period premiums are not for work performed.

California Supreme Court granted review of the Appellate Court’s decision.  It agreed to review and determine the following:

  1. Whether a failure to include meal or rest period premiums on the employee’s wage statement rightfully triggers waiting time penalties and wage statement penalties.
  1. What is the appropriate prejudgment interest rate for meal and rest period premiums?

What The Law Is Now

After careful consideration, the California Supreme Court concluded that meal and rest period premiums must be reported on the employee’s wage statement and paid within the statutory deadline for all wages due upon separation of employment.

In reaching its decision, the court rejected the conclusion of the Court of Appeal that meal period and rest break premiums are a legal remedy rather than a wage for work performed.  The court reasoned that the premiums are not just intended to provide compensation for the missed meal period or rest break, but also “for the work the employee performed during the break period.” The court also determined that the premiums constitute “wages earned” for purposes of the information that must be reported on a wage statement and rebuffed the contention that section 226 requirements apply only to wages paid.

What Does it all Mean?

What this means is that what appears to be a minor problem can be a huge problem.

For example, assume you have an employee who is claiming to have missed a dozen meal periods and a dozen rest breaks.  Previously, the understood liability was 24 hours of pay.  If that employee's regular rate of pay calculated out as $20 per hour, you would be looking at owing that employee $480, plus interest.

With this decision, the court is now saying that employee gets to have his $480 in unpaid premium, plus a waiting time penalty, and a wage statement penalty.  The waiting time penalty is 30-days of regular rate of pay.

If he was working eight hours per day and the failure to designate the premium pay was spread out over twenty-four wage statements, the waiting time penalty will be $4,800 and wage statement penalty will be $2,350.

So, a damage award fifteen times the previously understood liability!

Also, keep in mind that these claims can be asserted via class action or by way of the Private Attorney Generals Act (Labor Code, §§ 2699 et seq.) Moreover, the prevailing party would be entitled to recover interest, costs, and attorney fees.

Immediate Action Items

Create an Alternative Dispute Resolution Agreement

If you do not have one already in place, now is the time to implement.  This will remove these kinds of disputes from public courts of law and into private mediation and/or arbitration.  As we also are just learning, you can also couple a requirement that the employee assert all individual claims – including PAGA claims – in the alternative dispute resolution forum.

Calculate Employees’ Regular Rate of Pay

Employers must calculate nonexempt employees’ meal, rest, and recovery period premium payments based on both hourly wages and any other nondiscretionary wage payments.  This is the same method employers must use when they are calculating an employee’s “regular rate” for overtime purposes.

Itemize Premium Pay

Confirm that your wage statements separately itemize break penalties, describe the payment accurately (identifying it as a premium for meal or rest breaks, as applicable), and list the total pay of premiums, rate of pay at which the premiums are made, and how many hours of premiums are being paid.

Eliminate Time Rounding

Get rid of timekeeping system that uses any form of time rounding.  Rather, keep accurate records of clocking-in and clocking-out.

Give Yourself Wiggle Room

Provide slightly longer or more rest breaks and meal periods.  Consider standardizing a 15–20-minute break or 45-60-minute unpaid meals.  This will reduce the chance of a claim of a too short break or meal.

Revisit Your Timekeeping Practices

Review the policies you have in place to ensure that they are consistent with the law.  This may include considering a more thorough overhaul of your Employee Handbook or conducting an audit of existing timekeeping records.

You should also retrain all officers, managers, and supervisors on break and timekeeping issues.

Acknowledge Timekeeping Practices

Create a separate acknowledgement regarding meal periods, rest breaks, and time keeping policies for each employee to sign and date upon hire.

Attestation System

Create or update an attestation system for flagging missed, late, or short meal periods and rest breaks.  Ideally, a recording on a daily basis for each employee indicating whether, when, and how long each meal period and rest break took place.

How We Can Help

Please contact us with any questions as to how this recent California Supreme Court decision impacts you, your company, or your employees.  We assist employers of all sizes to get into compliance with wage-and-hour requirements.  This includes employee handbooks, timekeeping policies, as well as wage-and-hour audits.  We also are mindful of things you can do today to avoid problems tomorrow, such as preemptive settlement agreements and implementing innovative technologies.

You can contact Arif Virji, Samantha Pungprakearti, Justin Hein, or Kristin Mattiske-Nichols for an initial consultation.

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