Reversing a court of appeal decision that had been welcome news for employers, the California Supreme Court held today in Ferra v. Loews Hollywood Hotel, LLC, S259172, that the term “regular rate of compensation,” used for calculating meal and rest break premium payments, is synonymous with the term “regular rate of pay,” used for calculating overtime premium payments. In other words, meal and rest period premiums are not to be paid at the straight-time hourly rate, but rather at the “regular rate.”
Critically, the court refused to hold that its decision only applies prospectively. This means that the rule announced today applies retroactively to payments made before today.
Plaintiff Jessica Ferra filed a complaint against Defendant Loews Hollywood Hotel, LLC on behalf of herself and three alleged classes of hourly Loews employees. She alleged that Loews improperly calculated her premium payment when it failed to provide her with statutorily required meal and rest breaks in violation of California Labor Code section 226.7. Labor Code section 226.7 and the Industrial Welfare Commission Wage Orders require meal and rest break premiums to be paid at the employee’s “regular rate of compensation.”
Loews paid meal and rest period premiums to hourly employees at their base rate of compensation (i.e., their hourly wage) rather than the employees’ “regular rates of pay,” as that phrase has been interpreted in the overtime context under Labor Code section 510 (i.e., with adjustments to the hourly wage reflecting non-hourly compensation employees earned during pay periods). On a motion for summary adjudication, the trial court found that meal and rest period premiums under section 226.7 only have to be paid at the employee’s base hourly rate and not the “regular rate of pay,” as the terms “regular rate of compensation” and “regular rate of pay” are not synonymous.
The California Court of Appeal affirmed. The court looked to a basic principle of statutory construction which holds that where different words or phrases are used in the same connection in different parts of a statute, it is presumed the Legislature intended a different meaning. Turning to the legislative histories of Labor Code sections 510 and 226.7, the court noted the punitive nature of overtime laws (i.e., to punish employers for working employees more than a normal workday ), as compared to the compensatory nature of meal and rest period laws (i.e., to compensate employees who are injured by not being provided a break). Thus, the two terms must have a different meaning and “regular rate of compensation” just refers to the employee’s base hourly wage.
The Supreme Court’s Decision
The California Supreme Court reversed. The court opened by noting the general interpretive principle that the Labor Code will be interpreted in favor of protecting employees. With this foundation, the court found that the term “regular rate of compensation” is facially ambiguous, and could refer to either straight hourly wages or hourly wages plus nondiscretionary payments (i.e., the “regular rate of pay”). The court then turned to the two phrases at issue.
Focusing first on the phrase “regular rate of pay,” the court relied on “the backdrop of long-standing federal law that defined overtime pay in terms of an employee’s regular rate” to conclude that “regular rate,” by itself, has an established meaning as a legal term of art “encompassing not only hourly wages but also nondiscretionary payments.” Tracing federal and state legislative and decisional history, the court concluded that the phrase “regular rate” (without the “of pay” modifier) is the “operative term in section 510(a)’s phrase ‘regular rate of pay.’”
Turning to the phrase “regular rate of compensation,” the court looked to the regulatory and legislative history of the Wage Orders and section 226.7 to conclude that the original intent of both was for “regular rate of compensation” to have the same meaning as “regular rate of pay.” The court then held that the modifiers “of compensation” and “of pay” do not indicate different meanings, but are rather synonymous terms used interchangeably by the Legislature, the DLSE, and the courts. Over Loews’ protest that interpreting “regular rate of compensation” and “regular rate of pay” to be synonymous would violate canons of statutory interpretation by rendering the words “of compensation” and “of pay” superfluous, the court held that attributing controlling significance to these modifiers would lead to “an entirely unreasonable conclusion” and consequences that the Legislature “likely did not intend.”
The court concluded its opinion by holding that its decision applies retroactively.
What Employers Need to Know
California employers who had not already been paying meal and rest period premiums at the “regular rate” should revisit their practices.
The fact that the decision applies retroactively also suggests a flurry of litigation in the coming months challenging meal and rest period practices predating today’s decision.
Please contact your Payne & Fears attorney for current guidance on the subject matter of this article.