On July 15, 2021, the California Supreme Court handed down a decision which will have a significant impact on the way employers must pay hourly/non-exempt employees for missed meal periods, rest periods, and heat illness recovery periods. In Ferra v. Loews Hollywood Hotel, LLC, the Court held that such payments must be made at the “regular” rate of pay, not the base hourly rate. The court’s decision also will have a retroactive effect, meaning that employers must immediately change payroll practices and potentially pay employees back wages for the last four years.
Prior to this decision, employers were required to pay a penalty of one hour of pay for missed meal, rest and recovery periods under Labor Code section 226.7, which was widely understood to be one hour of pay at the base rate of pay. In light of the Ferra ruling, employers must now pay one hour of pay at the “regular rate of pay” used for overtime calculations, which is a weighted average that includes bonuses, incentives, commissions and other forms of compensation.
Employers in the retail and restaurant industries will be among those most affected and are at significant risk of class action lawsuits seeking retroactive payments for current and former employees.
Next Steps for Employers
Employers should contact their payroll providers as soon as possible and request changes to their payroll practices in order to remain in compliance. Also, they should consider conducting an attorney-client-privileged audit in order to assess potential liability for employee claims to retroactive pay for the past four years.
For more information or assistance with your compliance efforts, please contact us.