“Regular rate of compensation” or “regular rate of pay”:  is there a difference?  Not anymore.  According to the California Supreme Court, the phrases “regular rate of compensation” and “regular rate of pay” have the same meaning for the purposes of calculating meal and rest break premiums.  This means employers are required to pay their California employees’ meal and rest period premiums at their regular rate of pay rather than their base hourly rate.

When are employees entitled to meal and rest period premiums?

California employers are required to provide their non-exempt employees a reasonable opportunity to take a 30-minute meal period that begins before the end of their fifth hour worked when they work more than five hours.  California employers must also authorize and permit their non-exempt employees to take a 10-minute rest period for every four hours worked when they work at least three and one-half hours.  When employers fail to comply with these obligations (for example, by failing to provide a break at all, providing a break too late in the shift, providing a short break, interrupting a break, or exercising sufficient control of an employee during a break), non-exempt employees who did not receive compliant breaks are entitled to one additional hour of premium pay at their “regular rate of compensation.”

Then what does “regular rate of compensation” mean?

For many years, courts, attorneys, and employers have understood the phrase “regular rate of pay,” which is the rate at which employers must pay non-exempt employees’ overtime, to include not only an employee’s base hourly rate, but other compensation an employee earns such as piecework earnings, commissions, and certain bonuses.  Recently, in Ferra v. Loews Hollywood Hotel, LLC, the California Supreme Court held that the phrase “regular rate of compensation,” which is the rate at which employers must pay non-exempt employees’ meal and rest period premiums, has the same meaning as “regular rate of pay.”  Previously, many understood “regular rate of compensation” to mean employees’ base hourly rate, and accordingly many employers paid meal and rest period premiums at their employees’ base hourly rate rather than their “regular rate.”  It is now clear that paying non-exempt employees’ meal and rest period premiums at the employees’ base hourly rate violates the California Labor Code.

So what compensation is included in employees’ “regular rate of compensation,” and how is it calculated?

An employee’s “regular rate” (shorthand for “regular rate of compensation” and “regular rate of pay”) includes base hourly wages and other nondiscretionary payments “that are owed ‘pursuant to [a] prior contract, agreement, or promise,’ [and] not ‘determined at the sole discretion of the employer.”  Non-discretionary payments include things such as piecework earnings, bonuses (for hours worked, production or proficiency, or as an incentive to remain employed by the same employer), incentive pay, and commissions.  “Regular rate” does not include things such as purely discretionary gifts or bonuses or reimbursement for business expenses.  In no event may an employee’s “regular rate” be less than the minimum wage.

The following example highlights the critical difference between paying meal and rest period premiums at employees’ base hourly rate compared to their regular rate:

• Regular rate of compensation (correct):  An employee earns a base hourly rate of $20 per hour and $80 in commissions, and works 40 non-overtime hours during the workweek.  Therefore, the employee earns a total of $880 in nondiscretionary compensation for the workweek.  If the employer (correctly) paid the employee one additional hour as a meal or rest period premium at the employee’s regular rate, the premium payment would be $22 (that is, $880 divided by 40 hours).

• Base hourly rate (incorrect):  An employee earns a base hourly rate of $20 per hour and $80 in commissions, and works 40 non-overtime hours during the workweek.  Therefore, the employee earns a total of $880 in nondiscretionary compensation for the workweek.  If the employer (incorrectly) paid the employee one additional hour as a meal or rest period premium at the employee’s base hourly rate, the premium payment would be $20.  Using the base hourly rate in this scenario would result in a $2 underpayment and potentially trigger a cascade of resulting California Labor Code violations.

What’s at stake, and what should employers do now?

Meal and rest period claims are common and ripe for expensive and potentially devastating class action and Private Attorneys General Act claims.  At a minimum, employers should (1) evaluate their practices for paying meal and rest period premiums to ensure they pay such wages at employees’ regular rate rather than their base hourly rate, (2) evaluate and update written policies to clarify that meal and rest period premiums are paid at employees’ regular rate, and (3) in consultation with counsel, consider whether to issue retroactive meal and rest period premium payments to the extent employers have incorrectly paid them in the past.