California Supreme Court Settles Pay Rate For Missed Meal, Rest, And Recovery Periods

The California Supreme Court recently addressed what the proper rate for paying missed meals, rest, and recovery periods are under California state law. The California Supreme Court concluded that the rate must be calculated using not only the employees' base hourly rate but also a proportionate share of non-discretionary payments, thus increasing the rate. This ruling has been applied retroactively by the court.

Background

Under California's Labor Code, Section 226.7(c), employers are required to provide their employees with time for meals, rest, and recovery.  If such time is not provided, employers are required to "pay the employee one additional hour of pay at the employee's regular rate of compensation." In 2015, a bartender brought a class action suit against his former employer alleging that the employer failed to fully pay the required payments as the employer did not take into account in its calculations certain nondiscretionary incentive payments the employee received.

At issue in this litigation is the interplay of two areas of California law. Specifically, Section 226.7(c) discussed above, and Labor Code Section 510(a) which provides employees with overtime pay when employees work more than a certain amount of time. The overtime provision in Section 510(a) requires an employer to compensate an employee by a multiple of the employee's "regular rate of pay" while section 226.7(c) requires the payment to be made at the "regular rate of compensation." Here, the employer argued that these two payment calculations were distinct from one another based on the variation in wording and that, unlike the requirements for overtime payments, the employer was not required to take into account nondiscretionary incentive payments in calculating payments due for failures to provide the required meals, rest and recovery periods.

Lower Court Decisions

The trial court and court of appeals both ruled that meal and rest period premiums could be paid at an employee's base hourly rate because "compensation" should be interpreted differently than "pay." Specifically, the trial court found that the phrase "regular rate of compensation" was "not interchangeable" with the term "regular rate of pay" which governed overtime pay. Expanding on this point, the court of appeal held that these phrases were "not synonymous." The employee timely appealed the court of appeal's decision and the California Supreme Court granted review.

California Supreme Court's decision  

Acknowledging that the phrasing of these two regulations were slightly varied, the California Supreme Court chose to take a deeper dive into the intended meaning by the legislature and the Industrial Welfare Commission in enacting these provisions. The court began its analysis by noting that when construing the Labor Code and wage orders, the court is to adopt the construction that best gives effect to the purposes of the Legislature and Industrial Welfare Commission. Further, the court noted that these rules are to be liberally construed to favor the protection of employees.

After reviewing how the phrase "regular rate" had been interpreted in California and federal law and the related legislative purpose, the California Supreme Court found that the legislature intended the phrases at issue to be synonymous. As such, any nondiscretionary incentive bonuses earned by an employee should be included in calculations for determining the rate of pay owed to the employee in this situation. The fact these incentive payments may not be determined or paid until weeks or even months after a pay period did not affect this conclusion or excuse the employer. As noted by the court, the section only required the employer to pay the overtime premium as soon as convenient or practicable.

Beyond disagreeing with the employee's position on this matter, the employer also argued that if the court were to find in favor of the employee its decision should not be applied retroactively. The court rejected this argument.  The court ordered that the decision was to be applied retroactively.

Takeaway

California employers should review and update their California compensation practices to ensure that they use the employee's "regular rate of pay" when paying meal and rest break premiums rather than the base hourly rate of pay.  Notably, because the court ordered that the decision be applied retroactively, California employers should assess the impact of the retroactive application of this ruling on the employer's previous compensation practices.  Employers should determine the best approach for assessing and remedying any past situations or violations, if applicable.

R. Eddie Wayland is a partner with the law firm of King & Ballow.  You may reach Mr. Wayland at (615) 726-5430 or at rew@kingballow.com.  The foregoing materials, discussion and comments have been abridged from laws, court decisions, and administrative rulings and should not be construed as legal advice on specific situations or subjects.