The Ferra Decision
On July 15, 2021, the California Supreme Court unanimously held in Ferra v. Loews Hollywood Hotel, LLC that meal and rest break premiums must be paid at the “regular rate of pay,” which includes all non-discretionary payments. The decision has significant ramifications for California businesses, and highlights the urgent need for employers to review their meal and rest period practices to ensure compliance.
In Ferra, the plaintiff-bartender brought a class action against her employer, Loews, alleging Loews failed to pay her at her “regular rate of compensation” when it paid her meal and rest break premiums. Because Loews compensated her with hourly wages as well as quarterly nondiscretionary incentive payments, plaintiff argued that Loews’ premium pay, which was based solely on her hourly wage, was deficient under California Labor Code Section 226.7(c).
The California Supreme Court agreed with plaintiff, reversing the Court of Appeal’s decision. Finding that the Legislature intended the term “regular rate of compensation,” as used in Section 226.7(c), to have the same meaning as “regular rate of pay” under Labor Code Section 510(a) (dealing with the computation of overtime wages), the Supreme Court held that premium wages for noncompliant meal, rest, and recover periods must include “not only hourly wages but all nondiscretionary payments for work performed by the employee.”
The Court’s decision applies retroactively. The Court rejected Loews’ argument that retroactive application would “expose employers to ‘millions’ in liability” as unsupported by evidence. The Court sought to reassure employers by noting its decision was limited to the method of calculating premium wages – an employer, therefore, “may defend against” a claim under Section 226.7 “as it always has done.”
The Ferra decision is all the more important given what it may portend for the California Supreme Court’s long-awaited decision in Naranjo v. Spectrum Security Services, Inc. In Naranjo, the Court of Appeal held that “a section 226.7 claim is not an action brought for nonpayment of wages; it is an action brought for nonprovision of meal or rest breaks” – thus, “section 226.7 actions do not entitle employees to pursue the derivative penalties in [Labor Code] sections 203 and 226.” While Ferra rests on a different statutory basis than Naranjo, the Court’s willingness to liken premium pay to overtime wages suggests that it may be poised to overturn Naranjo.
Following Ferra (and in anticipation of Naranjo), we advise employers to closely review their meal and rest period policies and practices to ensure compliance with the mandates of California law. Specifically, employers should ensure they incorporate nondiscretionary compensation into calculating premium pay for noncompliant meal and rest periods for California employees.
If you are interested in discussing the issues raised by the Ferra decision, or have any other employment related questions, please feel free to contact us.