Meal and Rest Period Premiums Must Include All “Non-Discretionary Payments” and Not Just Hourly Wages

If an employer does not provide an employee with a compliant meal or rest period, Labor Code section 226.7(c) requires the employer to “pay the employee one additional hour of pay at the employee’s regular rate of compensation.” In Ferra v. Loews Hollywood Hotel, LLC, the California Supreme Court held that the “additional hour of pay” for meal or rest period violations must encompass all non-discretionary payments, as well as hourly wages. Thus, if an employer pays an employee non-discretionary incentive pay or bonuses, or commissions, those amounts must be included in determining the “hour of pay” the employer owes to the employee for a meal or rest period violation. (Note: The same rule applies to a “recovery” period, which is less common and refers to a cooldown period afforded an employee to prevent heat illness.)

Many employers have initiated practices of monitoring time records for apparent meal period violations and automatically paying an hour of pay accordingly. If the hour of pay was paid at an employee’s base hourly rate that did not include non-discretionary payments, then additional amounts may now be owed to the employee. Also, given the increased cost to an employer of a meal period premium, employers who provide employees flexibility regarding the scheduling of their meal periods may want to reconsider that flexibility and instead insist on strict meal period scheduling and reporting to avoid potential exposure.

The Decision Applies Retroactively

This part of the Loews decision may be the most difficult for employers to accept. Loews argued that the decision should not be applied retroactively, in part because of the significant exposure that application would create for California employers. In rejecting that argument, the Court reasoned that “it is not clear why we should favor the interest of employers in avoiding ‘millions’ in liability over the interest of employees in obtaining the ‘millions’ owed to them under the law.” However, in evaluating retroactivity, it is somewhat circular to simply reason that these amounts already were “owed” to employees. Because it took the California Supreme Court a lengthy and complex written decision to make the determination, it is reasonable to question whether these amounts were (or should have been) owed to employees prior to the Loews decision at all. Nonetheless, the retroactive application of the holding is likely to spur a wave of class action lawsuits.

What Should Employers Do Now?

In response to the Loews decision, employers should take the following measures:

• • • Review your meal and rest period practices to ensure strict compliance, as potential violations are even more costly now.
    • Review how you determine and pay premium payments for meal and rest period violations, and make sure that all non-discretionary payments are included in the calculation of the hourly rates used for such payments. This may require going back and separately paying an additional amount toward a prior premium payment when a non-discretionary payment was made at a later time.
    • Given the retroactivity of the decision, consider paying employees for any amounts “owed” if you paid meal and rest period premiums in the past based on an hourly rate that did not include non-discretionary payments. This may diminish the risk and impact of a lawsuit seeking to collect such payments.
    • Assess whether you want to continue offering non-discretionary pay, like bonuses or other incentives, to non-exempt workers. As it continues to become more difficult in California for employers to avoid wage and hour landmines, some employers may prefer to simplify how they pay hourly employees and avoid complexities that come from using payments like bonuses or other incentive pay.