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On July 15, 2021, the California Supreme Court issued an important decision about how to construe the term “regular rate of compensation” under Labor Code Section 226.7. Section 226.7 is the famous (or infamous) meal and rest break provision of the Code that requires an employer to pay employees “one additional hour of pay at the employee’s regular rate of compensation” for each workday that a meal, rest or recovery is not provided.

But how much is an hour of compensation? In Ferra v. Loews, the employer argued that the “regular rate of compensation” described in 226.7 should simply be an employee’s hourly rate. In other words, an employee whose base rate is $15 an hour would get $15 for missing a meal or rest break. The plaintiff/appellant had a different view. She argued that the term “regular rate of compensation” must include not only the base rate, but other nondiscretionary pay (for example, nondiscretionary incentive/bonus payments). Her theory was that the term “regular rate of compensation” should be read as synonymous with the phrase “regular rate of pay,” used in the overtime portion of the Code.

Unfortunately for employers, the Supreme Court unanimously adopted the plaintiff’s view. It held that the words “compensation” and “pay” are synonymous in the Code, and thus, when calculating meal or rest premiums, employers must determine the hourly rate in much the same way they calculate overtime, rather than defaulting to a base hourly rate. 

Perhaps more importantly, the Court decided that this interpretation should apply retroactively. Thus, companies that have been calculating meal and rest premiums at a base hourly rate now must be prepared to address potential claims from individual plaintiffs, or in class or Private Attorney General Act (PAGA) actions. While companies cannot change the past, they should work with counsel to review their meal and rest break policies, take steps to document the fact that employees are consistently taking or waiving those breaks (to the extent appropriate), and ensure that calculations of meal and rest break premium pay comply with this new decision.