Employer Beware of “Premium Pay” Calculations

In Ferra v. Loews Hollywood Hotel, LLC (“Ferra”), the Supreme Court held that the term “regular rate of compensation” under Labor Code section 226.7, which requires payment for not providing an employee with a compliant meal, rest or recovery period is synonymous with “regular rate of pay” under Labor Code section 510 and encompasses all nondiscretionary payments, not just hourly wages.

In Ferra, the defendant employed the plaintiff as a bartender paying her an hourly wage, as well as quarterly nondiscretionary incentive payments. If an hourly employee, such as the plaintiff, was not provided with a compliant meal or rest period, the defendant paid the employee an additional hour of pay according to the employee’s hourly wage at the time the meal or rest period was not provided. If the employee earned any nondiscretionary payments in addition to an hourly wage, like the plaintiff’s quarterly incentive payments, the defendant did not factor these payments into the calculation of premium pay owed under Labor Code section 226.7(c).

In 2015, the plaintiff filed a class action suit against the defendant alleging, in part, that defendant failed to pay her for noncompliant meal or rest breaks in accordance with her “regular rate of compensation” as required by section 226.7(c) because it omitted nondiscretionary incentive payments from its calculation of premium pay. The trial court granted summary adjudication for defendant on the ground that calculating premium pay according to an employee’s base hourly rate is proper under Labor Code section 226.7(c). The trial court agreed that “regular rate of compensation” in Labor Code section 226.7(c) is “not interchangeable” with the term “regular rate of pay” under Labor Code section 510(a), which governs overtime pay. In light of this holding, the court held that defendant’s due process challenge to Labor Code section 226.7 was moot. The court granted summary judgment to defendant on plaintiff’s remaining causes of action. The Court of Appeal affirmed and the Supreme Court granted review.

The Supreme Court noted that when construing the Labor Code and wage orders, the court adopts the construction that best gives effect to the purpose of the Legislature and the Industrial Welfare Commission (IWC.) Here,the Supreme Court characterized that purpose as the protection of employees, particularly given the legislative concern about working conditions, wages, and hours when the Legislature enacted key portions of the Labor Code. The court noted the term “regular rate of compensation” is not defined in Labor Code section 226.7. However, Labor Code section 226.7(c) and section 510(a) both use the term “regular rate,” and the history of these provisions shows that “regular rate” is a term of art encompassing not only hourly wages, but also nondiscretionary payments. Further, the words “compensation” and “pay” appear interchangeably in legislative and judicial usage. In reviewing the Legislative History of Labor Code section 226.7, the federal Fair Labor Standards Act of 1938 and IWC orders, the Supreme Court found no indication that the Legislature intended “regular rate of pay” in Labor Code section 510(a) and “regular rate of compensation” in section 226.7(c) to have different meanings. Specifically, the Supreme Court stated it found no evidence that “regular rate of compensation” means hourly wages only. Accordingly, the Supreme Court reversed the judgment of the Court of Appeal and remanded for further proceedings.

Ferra is an important decision for employers who should review and modify their policies to include all nondiscretionary payments, not just hourly wages when calculating the required “premium pay” when compliant meal, rest or recovery periods are not provided to the employee.

This document is intended to provide you with information about employment & labor law related developments. The contents of this document are not intended to provide specific legal advice. If you have questions about the contents of this alert, please contact the authors. This communication may be considered advertising in some jurisdictions.

July 19, 2021