California Employers Must Pay Premiums for Noncompliant Meal Breaks, Rest Breaks, and Recovery Periods at the Regular Rate of Pay—Not the Base Hourly Rate of Pay

Paying premiums for noncompliant meal, rest, and recovery periods to nonexempt employees in California just got more expensive. In a groundbreaking decision, the Supreme Court of California ruled today that the rate of pay when paying premiums is not the base hourly rate of pay, as so many employers have assumed, but rather the regular rate of pay—a rate that encompasses not only base hourly wages but also shift differentials, commissions, bonuses, and other per-hour value of nonhourly compensation the employee has earned. This is the same regular rate computation employers use to compute overtime pay owed. Frustratingly, the decision applies retroactively and will, without question, lead to a new wave of class and Private Attorneys General Act (“PAGA”) actions in California.

Background

California law has strict requirements for providing meal and rest breaks to nonexempt employees, as more fully discussed in this blog post. In addition, California employers that have employees who work outside in hot weather must provide “recovery periods” to avoid heat-related illness. Whenever an employer does not provide a compliant meal, rest, or recovery period, it must pay a premium payment of one hour of pay per day.

The rate of the premium payment was the focus of today’s ruling. Currently, most employers assume that they need only pay one hour of pay at the employee’s base hourly rate, a reasonable assumption based on a previous decision from a California Court of Appeal. The Supreme Court, however, rejected that approach, explaining that, like the calculation for overtime pay, the rate must include not only the employee’s straight-time wages but must also factor in any shift differentials paid and any nondiscretionary payments for work performed by the employee. For instance, just as an employer must include any sales bonus when calculating an employee’s regular rate of pay for overtime purposes, so too must an employer include the sales bonus when calculating the premium rate for meal, rest, and recovery periods.

More alarming, the decision applies retroactively, meaning that California employers who have used the employee’s base hourly rate to calculate premiums may become the targets of class actions, which can go back as far as four years, and PAGA claims, which go back only one year but cannot be compelled to arbitration.

What Employers Should Do Now

• Employers with California-based employees should immediately re-double efforts to ensure that they provide compliant meal and rest breaks and recovery periods. These efforts should include having counsel review meal, rest, and recovery period policies for compliance, as well as auditing practices to ensure that timely, uninterrupted breaks are provided as required by law.
• Employers, if they are not already doing so, should also immediately begin paying break premiums at the regular rate of pay rather than the base hourly rate, as any delay in making this change exposes companies to huge penalties.
• To the extent that employers have been paying premiums at only the base hourly rate, they should contact counsel to discuss how best to remedy the situation to mitigate against the risk of a class or PAGA action.