California Supreme Court Expands Pay for Missed Breaks
The Long Road to Meal and Rest Break Penalties
California has long required meal and rest periods for hourly employees. The requirement was often ignored, for many years, because failure to provide breaks resulted in almost no penalties.
This changed in 2000 after the state legislature mandated one-hour “wage” penalties for each day an employer fails to provide meal or rest periods as required. Since then employers have faced up to two penalties each day payable at an employee’s “regular rate of compensation," a definition that has confused employers for decades.
Now, more than 20 years after California first implemented meal and rest penalties, the California Supreme Court has (finally) clarified how they should be calculated.
What is an Employee’s “Regular” Rate?
Under Labor Code section 226.7 and state “wage orders,” employees who miss a meal period, rest period, or recovery period (a cooldown period afforded to employees to prevent heat illness) are entitled to an additional hour of pay (or "Wage Penalty") at the employee’s “regular rate of compensation.”
But what does “regular rate of compensation” actually mean?
Calculating the “regular rate” has been complicated by competing interpretations taken by different courts and agencies. On the one hand, “regular” could mean an employee’s usual base hourly wage – which is the rule employers have followed under a state appellate court opinion published in 2019. On the other hand, it could mean an employee’s “regular rate” as used for calculating overtime, which requires that an employee’s base rate be increased to reflect other nondiscretionary types of pay such as differentials and incentive bonuses. The conflict between these two possible interpretations confused employers for decades until the 2019 decision.
California Supreme Court Adopts a Broader “Regular Rate” Definition
On July 15, 2021, the California Supreme Court overturned the 2019 appellate court decision, holding that employers must use the broader definition of “regular rate” when calculating Wage Penalties.
In calculating amounts due to an employee, employers now need to include hourly pay and non-discretionary payments such as shift differentials and incentive bonuses. This should be a familiar calculation because it is the same formula used for calculating the “regular rate” for overtime premiums.
One example would be an employee working at a winery for 20 hours at $15.00 per hour, but who also receives a $25.00 bonus for wine club signups. Her usual base wage is $15.00 but her ‘regular rate’ is $16.25 ($15.00 x 20 hours plus $25.00 [$325], divided by 20 hours worked). If she missed rest periods on three days that week, but was paid only $45 in Wage Penalties, she would have been underpaid $3.75.
The New Definition Will Have a Massive Retroactive Impact
The Supreme Court’s opinion may seem like a small change, but it will have a huge impact. Depending on the Supreme Court’s opinion in another forthcoming case, for example, underpaid Wage Penalties may result in an overall wage underpayment when employees are terminated. If so, the “waiting time” penalty for a single underpayment would be up to 30 times an employee’s average daily pay. This, in addition to other potential penalties, including the dreaded Labor Code Private Attorneys General Act ("PAGA") suits faced by so many California employers each year.
The opinion also applies retroactively, so employers may have liability if they did not previously include non-discretionary compensation in Wage Penalties. Thus, beyond making proper payments going forward, employers may wish to examine their previous operations to make sure they were compliant over the past several years.
The case, Ferra v. Loews Hollywood Hotel, LLC, can be viewed here.
Entry Editors: Kristopher Lopez and Richard Rybicki