The California Supreme Court has issued a decision changing the way employers must compensate employees for missed meal and rest breaks under state law. In Ferra v. Loews Hollywood Hotel, LLC, the Court unanimously ruled that employers must pay their California employees premiums for meal, rest, and recovery break violations at the employees' regular rate of pay. This ruling reverses a 2019 decision from the Court of Appeal saying that premium pay would be based on the employees' hourly rate.

"Hourly rate" versus "regular rate"

Generally, the "hourly rate" is the set rate of pay that non-exempt employees earn for each non-overtime hour worked. The “regular rate” is the hourly rate, plus any additional nondiscretionary compensation -- which may include nondiscretionary bonuses, commissions, and shift differentials. The “hourly rate” is largely a static figure, but the “regular rate” can vary from one pay period to the next, depending on the amount of nondiscretionary compensation earned in any particular pay period. 

For example, suppose an employee's pay rate is $20 an hour, and her pay period is biweekly. Assuming two 40-hour workweeks with no overtime (including no daily overtime) and no other compensation, the employee's hourly rate and her regular rate will be exactly the same: $20 an hour. However, if that same employee earns a $100 productivity bonus for her work during the pay period, her regular rate will increase to $21.25 an hour. That is because her productivity bonus ($100) will be divided by the number of hours in the pay period (80 hours) and added to her hourly rate of $20. $100 divided by 80 is $1.25, so the productivity bonus results in a regular rate of $21.25 per hour.

In California, non-exempt employees are paid for overtime work at their regular rate of pay. Now, after Ferra, premium pay for missed meal, rest, and recovery breaks should also be paid at the regular rate.

The Ferra decision

The Ferra Court considered whether the legislature intended the phrase "regular rate of compensation" to have the same meaning as "regular rate of pay." In Labor Code section 510(a), which provides for overtime to be paid at the regular rate, the legislature used the phrase "regular rate of pay." In Labor Code section 226.7, which provides for premium pay if an employer fails to provide compliant breaks, the legislature used the phrase "regular rate of compensation." 

Employers argued that the legislature would have said "regular rate of pay" in Labor Code section 226.7 if it had intended for the premiums to be paid at the employees' regular rate. Because the legislature used "regular rate of compensation" instead, the employers argued, the legislature must have intended for premiums to be paid at the hourly rate. Many courts agreed. 

But the Supreme Court found that the legislature uses the terms "compensation" and "pay" interchangeably. Further, the Court said, "regular rate" -- rather than "of pay" or "of compensation" -- is the operative language. Finally, the Court noted that the Labor Codes must be liberally construed in favor of employees.

What should California employers do now?

Of course, California employers with non-exempt employees must update their payroll practices to compensate employees for missed meal and rest breaks at the employees' regular rate of pay. But that's not all. The Ferra decision applies retroactively, which means employers can be held liable for non-compliant practices that pre-date the Court’s ruling. Thus, employers should consult with their California employment attorneys to determine the best approach for assessing and remedying any past violations.

Quick refresher on California meal break/rest break rules

Meal breaks. Non-exempt employees working a shift longer than 5 hours are entitled to at least a 30-minute, uninterrupted meal break. The employee must be relieved of all work duties during the break, and the break must begin before the end of the fifth hour of work. Non-exempt employees are entitled to a second 30-minute, uninterrupted meal break if they work a shift longer than 10 hours. The second meal break must begin before the end of the 10th hour of work. 

Employees can waive their right to their first meal break if they work a shift of less than 6 hours. Employees can waive their right to a second meal break if they took a compliant first meal break and are working a shift of less than 12 hours.

Rest breaks. Non-exempt employees working at least 3.5 hours are entitled to a paid, 10-minute, uninterrupted rest break. Non-exempt employees are entitled to a second paid 10-minute, uninterrupted rest break if they work more than 6 hours, and a third if they work more than 10 hours. To the extent possible, employees should take their rest breaks near the middle of each work period.  

Meal and rest breaks. For all breaks, employees must be relieved of all job duties. Further, employers cannot require that employees stay on the premises during their breaks. Employers cannot schedule breaks back to back, and breaks cannot be put at the beginning or end of a shift to shorten the shift length.

The employer's obligation is to provide employees with the opportunity to take the breaks they are entitled to. If employees do not want to take breaks for their own personal reasons, the employer will be compliant as long as the break opportunity was provided.

If the meal or rest break is non-compliant (for example, missed, late, or short for a reason other than the employee's personal choice), the employer must pay the break premium.

At the employee's regular rate.