Yesterday, the California Supreme Court shocked the business world with a broadside blow that now potentially marks every single employer with thousands, if not millions of dollars in unpaid wage liability, and potential Private Attorney General Act (“PAGA”) penalties.
As many of you know, Labor Code section 226.7 requires employers to pay their employees an extra hour of wages if that employee was not provided a legally compliant meal or rest period, including meal and rest periods that were short, late, or missed entirely. For years, lower courts have time-and-again held that the extra hour of wages was to be the equivalent of the employee’s base wage rate. If an employee’s base wage rate was $20.00 per hour, that employee simply received an extra $20.00 if they were not provided a compliant meal or rest period. But no more. Yesterday, the California Supreme Court in Ferra v. Loews Hollywood Hotel, LLC held that the extra hour of pay must be calculated using the “regular rate of pay” calculation that employers must use to determine overtime pay – and that this requirement is retroactive.
To help understand the magnitude of this decision, unlike the base wage rate, the “regular rate of pay” involves a complex mathematical formula that takes into consideration the employee’s entire non-discretionary remuneration, including commissions and non-discretionary bonuses. For example, imagine our hypothetical “Joe” earns $20.00 per hour. One week, Joe worked his regular 40 hours, but also received a $100 non-discretionary bonus for perfect attendance that week. To calculate Joe’s “regular rate of pay,” as opposed to his simple base wage rate, the employer must multiply Joe’s total hours worked by his base wage rate PLUS add-in the $100 non-discretionary bonus, and then finally divide that sum by the total hours worked:
40 hours worked @ $20.00 per hour = $800
$800 of wages + $100.00 bonus = $900
$900/40 hours worked = $22.50
This formula can get very complicated when an employee earns a commission or bonus over a multiple-week period, not just within a single workweek.
Thus, unlike his simple base wage rate, Joe’s “regular rate of compensation” is actually $22.50. This $2.50 difference may not seem like a lot, but the California Supreme Court’s decision is retroactive. That means, if an employer has paid an employee an hour of wages for having failed to provide a compliant meal or rest period anytime over the past four years, but made that payment using the old base wage rate calculation (as previously approved by lower courts), that employer may now be considered to have made the payment incorrectly, shorted the employee the full amount owed, and may be liable for a host of Labor Code violations subject to class action lawsuits, as well as related PAGA penalties.
Meanwhile, the same day the California Supreme Court levelled this decision against employers, Disney announced it was relocating at least 2,000 employees from California to Florida.
If you believe your company may be affected by this latest change to the pay requirements, or have any questions, please feel free to contact Holden Law Group to discuss.