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California Court Decides How to Calculate Meal And Rest Period Penalties – Finally – Plus a Rounding Decision

by D. Gregory Valenza | |

If your job involves dealing with meal and rest periods and calculating overtime, well, I pity you.  Then again, mine does too. Pity Party at Greggie’s! 

Anyway, if this scintillating area of wage and hour law is part of your job, you know there are “regular rates,” and there are “regular rates.”  For example, overtime pay is calculated by multiplying the “regular rate” of pay by 1.5 (or 2.0).  On the other hand, if someone is denied a compliant meal or rest period, that person is due a penalty of one hour of pay at the “regular rate of compensation.”   Both calculations contain the term “regular rate.”  But do they mean the same thing? 

In overtime parlance, the “regular rate of pay” is a calculation of all the compensation earned in the pay period (less exclusions) divided by the hours worked. Generally speaking, that is.  For overtime, the “regular rate” would include the base hourly rate, commissions, and other forms of compensation.  But when calculating a meal period penalty, does the term “regular rate of compensation” mean one hour of the “normal,” hourly rate paid to the worker (like the base rate?)  Or does one have to pay it at the same “regular rate of pay” used to calculate overtime?  “Regular rate of pay” v. “regular rate of compensation.” They sound alike; but are they, exactly alike?

That issue has vexed employers and their lawyers for many years.  And by vexed, I mean it has been the subject of many, many expensive class action lawsuits. 

Be vexed no more, dear reader.  Because the California Court of Appeal has decided: No. They are not the same.  A 2-1 majority in Ferra v. Loews Hollywood Hotel, LLC, (opinion here) decided that the Legislature intended the term “regular rate of compensation” to mean “normal” or “hourly base rate.”  The court reasoned the Legislature could have used the term “regular rate of pay” in both statutes if they had intended both laws to mean the same thing:

If the Legislature had intended meal and rest break premiums to be calculated the same way as overtime premiums, it would not have used “regular rate of compensation” when setting premiums for missed meal and rest breaks, and “regular rate of pay” when setting premiums for overtime work. 

The Court also noted overtime pay is different from meal and rest period penalties in a key respect.  Overtime pay is a premium paid to employees for working extra hours.  Meal / rest period penalties, on the other hand, are extra compensation for being denied lawful meal or rest periods:

The “central purpose” of overtime pay is to pay employees wages for time spent working. (Id. at p. 1109.) A section 226.7 action, however, is “not an action brought for nonpayment of wages; it is an action brought for nonprovision of meal or rest breaks.” (Kirby v. Immoos Fire Protection, Inc. (2012) 53 Cal.4th 1244, 1257.)  

If this opinion becomes final (see caveat below), meal or rest period premiums due will have to be calculated based on the base hourly rate, not the “regular rate” used for overtime purposes.  This will save payroll managers many headaches concerning what to do about complex regular rate calculations, such as those involving monthly bonuses, or later-earned bonuses and commissions.  

One Justice dissented.  His primary argument is that the terms “regular rate of pay” and “regular rate of compensation” are synonymous.  He supported this argument with examples of how the terms “pay” and “compensation” are used interchangeably in court decisions, and even in the Labor Code.  He makes a point, but fortunately not one that carried the day here. 

So, caveat:   this opinion is not final. The Court could grant “rehearing,” or the California Supreme Court could depublish the opinion and/or grant review.  So, before changing policies, employers should wait until the opinion is final (within the next 60-90 days). I will post an update if and when it is, or if review is granted.  Even then, the Legislature could pass a law clarifying the calculation of the meal / rest period penalty. But that would be effective January 2021 in all likelihood, as the current session is over. 

Finally, the Court of Appeal also decided in the same case that the hotel’s rounding practice was lawful.  The hotel had an automatic timekeeping system that rounded up or down to the nearest quarter hour.  In addition, 

the Loews Attendance Policy stated: “A seven (7) minute grace period, prior to the beginning of a shift, and a six (6) minute grace period, after the scheduled start time, is incorporated into the timekeeping system and provides the team member with a degree of flexibility when clocking in. A team member who clocks in after the (6) six minute grace period is considered tardy for work.” 

The evidence before the court was that a bare majority lost more time than they gained due to rounding, over a period exceeding a year.  However, the program was truly neutral in that it rounded up or down without discretion.  Employees also benefited from the grace period when they punched in late. The Court held that the rounding policy did not violate California law:

We agree with the trial court that Loews’s rounding policy does not systematically undercompensate its employees over time.10 As AHMC states, a “fair and neutral” rounding policy does not require that employees be overcompensated, and a system can be fair or neutral even where a small majority loses compensation. … Ferra did not demonstrate that Loews’s rounding policy systematically undercompensated employees over time. 

The Court did not address the effect of the California Supreme Court’s decision in Troester v. Starbucks Corp. (2018) 5 Cal.5th 829, 848,  in which the Court rejected the “de minimis” rule in wage and hour law.  Therefore, it may be hard to understand how a single employee who loses time due to rounding is paid for “all hours worked” as the law requires, even if rounding results in full compensation for all employees over time, on average.  I’m just being honest.  That said, right now, neutrally applied rounding remains good law in California.  Just ensure that it is implemented consistent with case law such as this decision right here, as well as AHMC Healthcare, Inc. v. Superior Court (2018) 24 Cal.App.5th 1014, Donohue v. AMN Services, LLC (2018) 29 Cal.App.5th 1068, and See’s Candy Shops, Inc. v. Superior Court (2012) 210 Cal.App.4th 889.  

Bye for now. 


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