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On July 15, 2021, the California Supreme Court, in Ferra v. Loews Hollywood Hotel, LLC, clarified the rule for calculating the premium required when employees are unable, because of workload, to take a timely rest or meal period. Given the potential for employees to sue employers in class actions for failing to strictly comply with this rule, and the fact that the holding applies retroactively, this is a significant development.
By way of background, California employers are required to provide nonexempt employees a paid 10-minute rest period for every 4-hours of work, and an unpaid 30-minute uninterrupted meal period by the end of the 5th hour (and 10th hour, if applicable) of work. These rules should already be quite familiar to employers.
The California legislature recognizes this is not always possible due to an employee’s workload or other issues. Therefore, an employee who is not provided required rest and/or meal periods must be paid an additional hour of pay at the employee’s “regular rate of compensation” for every missed meal or rest period. Until the Ferra decision, this “regular rate of compensation” was simply a worker’s hourly wage, without regard to additional, non-discretionary payments, such as bonuses or shift differentials.
In Ferra, the Court held the opposite, that meal or rest period premiums must be paid at a rate of pay that reflects regular pay + incentives, such as non-discretionary bonuses or shift differentials. Calculating this “regular rate of compensation” for rest and meal period premiums now mirrors the formula previously applied to determine the “regular rate of pay” when calculating overtime premium pay.
If an employee is indeed paid non-discretionary bonus or incentive pay, the calculation of his or her “regular rate of compensation” can initially seem somewhat daunting. Consider an employee who earns $17/hr, but also receives an additional $3/hr shift differential when she works a night shift. In a particular week, she works 60 hours (40 regular hours, 13 overtime hours and 5 double time hours). Of those 60 hours, 30 are paid at the employee’s base rate of $17, and the remaining 30 hours are paid at $20/hr to reflect the $3 night shift differential.
Under the old rule, any rest or meal period premium would be paid at the employee’s base pay, $17. However, under the Ferra holding, an additional calculation must be conducted, which establishes the rest or meal period premium must be paid at the weighted average rate of $18.50. (Total compensation is $1,110, divided by 50 hours, equals the weighted average rate of $18.50; this is her “regular rate of compensation” for that week only.)
Given this development, what should employers do? We recommend the following:
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The California Supreme Court recently issued an important opinion clarifying employers’ obligations to provide employee rest periods. Specifically, in Augustus v. ABM Security Services, Inc., 2 Cal.5th 257, the Court reinstated a trial court order awarding approximately $90 million to a class of employee plaintiffs and held that employers (1) must relieve their employees of all duties during rest periods, and (2) must relinquish any control over how employees spend their break time. This Bulletin discusses the background and additional considerations addressed by the Augustus Court in this critical decision.
Case Background
ABM Security Services employs several thousand security guards throughout California. A large class of the guards sued, claiming ABM failed to provide proper rest periods in compliance with California law. More specifically, the guards claimed ABM required them to keep their pagers and radios on during rest periods and to “remain vigilant” and responsive to calls when needs arose, including escorting tenants to parking lots, notifying building managers of mechanical problems and responding to emergency situations.
The Los Angeles Superior Court granted a motion for summary judgment brought by the employees and awarded them approximately $90 million in damages. The Court of Appeal reversed this order, finding that simply being “on call” did not constitute “performing work” and therefore did not violate California’s rest period laws.
The Applicable Law
California law, set forth in Cal. Labor Code Sections 226.7, 512 and Industrial Welfare Commission (“IWC”) Wage Order No. 4-2001, requires that employers provide a paid 10-minute rest period every four (4) hours of work (or fraction thereof) to any employee who works more than three-and-one-one-half hours per day. The law stipulates that employees should not be required “to work” during this break.
The California Supreme Court Opinion
The Supreme Court disagreed with the reasoning of the Court of Appeal and reversed, reinstating the $90 million damages award. It did so by adhering to the plain language of the Wage Order, which simply requires employees be relieved of all work-related duties and employer control during 10-minute break periods. The Court also found support for its position in what it termed the “practical realities” of rest periods. While a policy requiring employees to remain on an employer’s premises during rest periods does not establish employer control, requiring employees to carry devices or otherwise remain reachable during a break suggests impermissible employer control.
The Court recognized that employers do have options if an exigency arises and the employee is needed during his or her break. First, it said, “Nothing in our holding circumscribes an employer’s ability to reschedule a rest period when the need arises.” Additionally, the employer may provide employees with another rest period to replace one that was interrupted or pay the employee the premium pay required under the applicable IWC Wage Order and Labor Code Section 226.7. This premium equates to one additional hour of pay at the employee’s regular rate of pay for each day that a rest period is not provided.
What Should Employers Do in Light of the Augustus Opinion?
California employers have collectively paid hundreds of millions of dollars in verdicts, settlements and administrative claims as a result of failing to strictly adhere to the rest period requirements. The Augustus opinion should serve as a wake-up call to any employer who does not already comply with this law. At a minimum, employers should not only review their policies to ensure that employees receive 10-minute rest periods free from duties and employer control, but also take steps to ensure that managers are properly trained to implement this policy.
Conclusion
Employers with lingering questions concerning their rest period policies should not hesitate to contact their experienced employment law counsel.
As the ink from California Governor Jerry Brown’s pen dries on Assembly Bill No. 10, which will raise the hourly minimum wage in our state to $9.00 effective July 1, 2014 (and again to $10.00 on January 1, 2016), employers need to consider the ramifications of this change beyond the obvious increase in take-home pay of hourly workers.
Here are key areas that will be impacted by the increase:
Salary Basis Test For “White Collar” Exemption – In addition to meeting other criteria to qualify as an exempt employee under one of the “white collar” exemptions (i.e., executive, administrative or professional), exempt employees must earn a salary that is at least twice the minimum wage for full-time employment. This minimum increases in July, 2014 to $37,440, and to $41,600 beginning in January, 2016.
Commissioned Sales Employee Exemption – To qualify for this exemption, employees must earn in excess of 1.5 times the minimum wage for all hours worked. This rate will increase to $13.50/hr on July 1, 2014, and $15.00/hr on January 1, 2016.
Employees Who Furnish Own Tools or Equipment – When employees are required to furnish their own tools or equipment necessary to their performance of the job, they must be paid twice the state minimum wage. This rate will increase to $18.00/hr on July 1, 2014, and $20.00 on January 1, 2016.
Calculation of Overtime, Vacation, Sick Leave, Paid Time Off and Meal and Rest Period Premiums – Employers must adjust how these are calculated to reflect the minimum wage increase.
Employer-Required Split-Shift Premiums – If an employer requires an employee to work a split-shift, the employer must pay the employee a premium, of one hour’s pay at minimum wage, in addition to the employee’s regular earnings paid for that shift. (If hourly wage exceeds state minimum wage, difference may be credited toward split-shift premium.)
Voluntary Crediting Agreements – Employers with written agreements with their employees for crediting meals or lodging expenses against the minimum wage will need to adjust this crediting to reflect the increase.
Posting The New Wage – Employers will be required to conspicuously post the new wage in an area frequented by employees where it may be easily read during the workday.
Cities With Higher Minimum Wage – Certain California cities, including San Francisco and San Jose, may impose a higher minimum wage and/or adjust their minimum wage more frequently. Employers should ensure they comply with all applicable federal, state and local laws.
