On July 15, 2021, a California Supreme Court ruling provided clarity on which rate of pay to use when compensating unclaimed rest periods to employees based on its ruling in Ferra vs. Lowes Hollywood Hotel, LLC. The recent ruling stated that the extra pay must be calculated at the employee’s “regular rate of pay,” which is the formula used to determine overtime premiums under the state labor code and must take into account all nondiscretionary payments.
California’s Labor Code Section 226.7 states that nonexempt employees should be compensated for one additional hour in lieu of their unclaimed rest periods. Employers failing to compensate their employees for these break periods must then compensate them for one additional hour of work at the employee’s “regular rate of compensation.”
An employee’s “regular rate of pay” is not the same as an employee’s traditional hourly rate. The “regular rate of pay” is calculated by including all compensation received during the workweek. Total compensation should include hourly earnings, salary, piecework, bonuses, shift premiums, shift differentials, and/or commissions. Once the total weekly earnings are calculated, this amount should be divided by the number of hours the employee worked that week. We have broken this down into an easy formula to use when calculating pay for your affected employees:
Hourly Earnings + Salary + Piecework + Bonuses + Shift Differentials + Shift Premiums + Commissions = Total Weekly Earnings
Total Weekly Earnings / Total Hours Worked = Regular Rate of Pay
(Regular Rate of Pay x 1 hour) x each day the employee had unclaimed rest periods = Total Amount to be Paid to Employee
The Supreme Court made this ruling retroactively. Therefore, California employers may expect a new wave of class action and Private Attorney General lawsuits following the Ferra decision.
Employers Next Steps
- This case makes it all the clearer that multi-state employers need to fully understand and to comply with various aspects of the different laws of the US states in which they operate.
- The court held that the decision applies retroactively, California employers should review their current pay practices to ensure they include nondiscretionary payments in their premium pay calculations.
- Employers should review and update payroll policies to ensure compliance with the calculation of the meal and rest period premiums.
- Employers should review all of their incentive programs that may raise the regular rate of wage payments to non-exempt employees, to understand how they impact this new ruling.
- If you are a Full-Service or Managed Payroll Client and would like our assistance in ensuring your current pay practices are in compliance, please email us.
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This content is provided with the understanding that HR Knowledge is not rendering legal advice. While every effort is made to provide current information, the law changes regularly and laws may vary depending on the state or municipality. The material is made available for informational purposes only and is not a substitute for legal advice or your professional judgment. You should review applicable laws in your jurisdiction and consult experienced counsel for legal advice. If you have any questions regarding this content, please contact HR Knowledge at 508.339.1300 or email us.