Significant change in law regarding payment of meal and rest period penalties. In July 2021, the California Supreme Court issued a decision that impacts all employers who pay non-exempt employees an hourly rate plus non-discretionary payments made for work performed by an employee (including service charges, commissions, non-discretionary bonuses, shift differentials, or piece rate.)  The holding in Ferra v. Loews Hollywood Hotel states that employers must pay the one-hour meal or rest period penalty at the “regular rate,” which includes the employee’s hourly rate and the non-discretionary payments made to the employee in the work week in which the meal or rest period penalty is paid.

Now, when paying the meal or rest period penalty to non-exempt employees who earn non-discretionary payments, employers must determine the “regular rate” of pay by taking the total wages earned for the workweek, i.e., base hourly wage x hours worked + additional non-discretionary payments, and dividing that amount by the hours worked in the workweek. This Supreme Court decision is retroactive. This means that the decision applies to past practices and penalties that have already been paid, subject to claims that are barred by the three-year statute of limitations.

This “regular rate” calculation also applies to payment of HWHF sick leave and COVID-19 sick leave. The same exposure exists when it comes to payment of the California mandatory sick leave under the Healthy Workplace Healthy Family Act (HWHF), which must also be paid at the employee’s “regular rate.”  If a non-exempt employee receives an hourly wage plus non-discretionary pay and takes HWHF sick leave in a workweek for which the employee received such non-discretionary pay, the employer must calculate the employee’s “regular rate,” including those additional forms of pay, and pay the HWHF sick leave at the higher, adjusted “regular rate.”

The Labor Code states that this calculation may be made either for the workweek in which the paid sick leave was taken or by dividing the employee’s total wages, not including overtime premium pay, by the employee’s total hours worked in the full pay periods of the prior 90 days of employment.  A similar calculation was also required for sick leave taken pursuant to California’s COVID sick leave requirements, although the COVID-19 sick pay requirement expired September 30, 2021.

What should you do now?

  1. Examine your compensation methods and consider eliminating non-discretionary pay.
  2. Strictly comply with the meal and rest period rules. Make sure you have a compliant meal and rest period policy, and document if an employee voluntarily skips or takes a short meal or rest period.
  3. When paying the meal or rest period premium or HWHF sick leave to employees who are paid an hourly rate plus non-discretionary payments, make sure to correctly calculate the “regular rate” for payment of the meal/rest period penalty or the sick leave hours. Make sure your payroll service understands this calculation and is paying the correct “regular rate.”
  4. When paying out HWHF sick leave or meal/rest period penalties at the “regular rate,” show the payment as a separate line item on the employee’s paystub.
  5. Determine what to do about prior payments of HWHF sick leave, COVID-19 sick pay, and meal/rest period penalties.