California employers should be familiar with Labor Code section 226.7, which requires the payment of a one-hour premium to non-exempt employees who do not receive compliant rest breaks and meal periods. The language in section 226.7 (c), however, has been the subject of dispute:

(c) If an employer fails to provide an employee a meal or rest or recovery period in accordance with a state law, including, but not limited to, an applicable statute or applicable regulation, standard, or order of the Industrial Welfare Commission, the Occupational Safety and Health Standards Board, or the Division of Occupational Safety and Health, the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each workday that the meal or rest or recovery period is not provided (emphasis added).

What does the term “regular rate of compensation” mean? Labor Code section 510, which regulates the payment of overtime to non-exempt employees, states that overtime must be paid at the employee’s “regular rate of pay,” which may be more than the employee’s “base” rate, if, for example, the employee was paid a bonus in addition to their hourly wages. Does “regular rate of compensation” have the same meaning?

The California Supreme Court answered this question today in Ferra v. Loews Hollywood Hotel, LLC, stating, “We hold that the terms are synonymous: ‘regular rate of compensation’ under section 226.7(c), like ‘regular rate of pay’ under section 510 (a), encompasses all nondiscretionary payment, not just hourly wages.” The Court reversed the Court of Appeal’s decision to the contrary.

I won’t bore you with the many pages of discussion about statutory interpretation. The bottom line is this: if an employee’s base hourly rate of pay is $15, for instance, but their regular hourly rate of pay (i.e., overtime rate) because of a bonus or other compensation is $22.00, then the employer must pay the premium required by section 226.7 at the $22.00 per hour rate.

As with most court decisions, the Ferra decision is retroactive. That fact is decidedly bad news for employers, who likely will face legal claims if they paid 226.7 premiums at the base rate of pay, rather than the regular rate.

Before you make any changes to your current practices, contact your employment law counsel. There are significant ramifications to the Court’s decision today, and employers should carefully consider their next steps.

Read the decision here.