California Supreme Court Adds Break Rules

Wed, 08/04/21

California Supreme Court Adds To Cost Of Doing Business By Requiring Employers To Pay For Missed Breaks at a Higher Rate of Pay

On July 15, 2021, the California Supreme Court decided in Ferra v. Loews Hollywood Hotel, LLC, that employers must pay premium payments to employees for missed meal, rest, and recovery breaks at the employee’s “regular rate of pay” (used to calculate overtime payments) instead of the employee’s base hourly rate, as most employers have always done. The Court further held that the ruling is retroactive, which will likely result in a new wave of class action suits alleging that employers who have paid meal and rest period premiums over the last four years have done so at the incorrect rate, which in turn will trigger penalties and/or attorney’s fees. This Alert evaluates the nature and extent of the likely liability risk raised by this new decision, outlines proactive steps employers can take to reduce exposure, and explores other areas of liability that may follow based on similar reasoning.  

Facts and Holding of the Case.  

Jessica Ferra was employed by Loews Hollywood Hotel as a bartender. She was paid hourly wages and quarterly nondiscretionary incentive bonuses. Loews paid employees who missed a meal or rest break an hour of pay at the base hourly rate, without factoring in quarterly incentive bonus payments into that hourly rate.  In doing so, Loews, like most employers, assumed the requirement in Labor Code § 226.7 for missed break premiums be paid at the “regular rate of compensation” meant payment at the employee’s base hourly rate. Ferra filed a lawsuit challenging this assumption, arguing that “regular rate of compensation” is synonymous with “regular rate of pay,” used to calculate overtime payments. The trial court and Court of Appeal sided with Loews. Ferra appealed to the California Supreme Court, which reversed, holding that “regular rate of compensation” has the same meaning as “regular rate of pay” and that employers must therefore pay any missed break premiums at the hourly rate used for overtime payments. Rejecting warnings of the potential impact on employers, the court went a step further and held that the decision applies retroactively, subject only to the applicable statute of limitations, which means a four year look back at potential underpayments of missed break premiums.  

Will Penalties Apply?  

Currently pending before the Supreme Court is another case addressing the issue of whether break premiums are “wages” that must be properly recorded on wage statements (or be subject to wage statement penalties), and which may trigger waiting time penalties if not paid timely to departing employees. The outcome is hard to predict, but since the Supreme Court took the appeal after the Court of Appeals held that meal premiums did not trigger those penalties, it may suggest that the Supreme Court intends to reverse the appellate court decision.  

Will Employers Still Have Viable defenses?  

The short answer is yes, especially as to class actions. Whereas Ferra clarifies how missed break premiums should be calculated, it does not prevent employers from arguing, as they have always done, that such premiums are not warranted under the Brinker guidelines, so long as employers relieve employees of all duties, permit them a reasonable opportunity to take an uninterrupted break and do not impede or hinder them from doing so. Moreover, the fact that an employer voluntarily made break premium payments is not irrefutable evidence of actual missed breaks as employers often make such payments out of an abundance of caution or simply to avoid the administrative cost of investigating the reasons for missed breaks. These are threshold fact questions that often cannot be resolved on a class basis.  

Key Takeaways and What to Do.  

The Ferra case presents some serious challenges that employers will need to address quickly. Here are some recommended steps that employers should consider:

  • Update Premium Payment Systems and Procedures. Employers should update their missed meal/rest period premium payment system to base it on the applicable regular rate of pay, similar to systems that may already be in place to process supplemental overtime payments. This may include instituting a system to make “true up” payments at the regular rate of pay upon issuance of monthly or quarterly non-discretionary bonuses.
  • Restitution for Past Underpayments. There is no simple answer to the question of whether and when to make restitution payment to employees who received premium payments in the past at the base rate only. One approach, based on anticipated class actions, is to make full restitution payments now to help avoid litigation costs in the future. However, this is still an evolving legal landscape, with undetermined issues such as the application of penalties and, as noted above, there are viable defenses, especially to class claims. One possible approach would be to avoid payment now but pay upon termination of an employee to avoid waiting time penalties. At a minimum, however, every employer should assess its potential liability with a four year look back and then seek legal counsel to determine the best course of action.
  • Reconsider Some Past Practices.Many employers have a payroll system in place for automatic payment of premiums whenever time records show a missed break, regardless of whether the employee actually missed the break or the reason for missing the break. In light of the Ferra decision, employers may want to reconsider this no-fault automatic payment system. Similarly, employers may want to consider raising employees’ base rate of pay and eliminating non-discretionary bonuses as they create a lot of extra work and legal exposure.
  • Redouble Efforts to Enforce Meal and Rest Break Policies. This decision should hopefully provide an impetus to employers to revisit and reinforce meal and rest break policies, with the knowledge that the best defense is to be able to establish that employees are given a meaningful opportunity to take uninterrupted breaks.

Ramifications for Other Types of Pay: Paid Sick Leave Pay for Hourly Employees is also at the Regular Rate of Pay. An often-overlooked provision of California’s paid sick leave law is that the rate of pay for the statutorily required paid sick leave for hourly (non-exempt) employees is also the regular rate, not the straight hourly rate of employees.  This is different than how employers might pay vacation or holiday pay, so it can often slip by even the most seasoned of HR professionals and payroll personnel.    To determine the rate of pay for nonexempt employees taking sick leave, the employer may either: Calculate the regular rate of pay for the workweek in which the employee used paid sick leave, whether or not they actually worked overtime in that workweek, taking into account any nondiscretionary bonus paid for that work week, or Divide the total compensation for the previous 90 days (excluding overtime premium pay) by the total number of non-overtime hours worked in the full pay periods of the prior 90 days of employment For exempt employees, paid sick leave is calculated in the same manner the employer calculates wages for other forms of paid leave time (for example, vacation or holiday pay).

If you have any legal questions or need any additional information on this topic, please call Arif Virji or Dawn Ross at Carle, Mackie, Power & Ross LLP at (707) 526-4200.

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