In Ferra v. Loews Hollywood Hotel, LLC, the California Supreme Court determined that the phrases “regular rate of compensation” and “regular rate of pay” are synonymous for the purposes of California Labor Code section 226.7(c) and the California Industrial Wage Orders.  With this seemingly innocuous ruling, however, the Supreme Court has handed a potentially large number of California employees a very expensive “IOU” from their current and former employers.

As everyone knows (or should know), overtime is paid at one and a half times an employee’s “regular rate of pay.”  Unlike an employee’s standard hourly rate, the “regular rate of pay” includes different kinds of remuneration, such as hourly earnings, salary, piecework earnings, non-discretionary bonuses, and commissions.  The question posed in Ferra concerned California law regarding meal and rest break premiums.  Specifically, California law provides that employees who do not receive their required meal or rest break are owed “premium pay” consisting of an additional one hour of wages for every missed break paid at the employee’s “regular rate of compensation.”  The question before the Supreme Court was whether “regular rate of compensation” refers to the employee’s standard hourly wage OR to the employee’s regular rate of pay.  After a thorough discussion of the history of the adoption of section 226.7 and of certain provisions in the federal Fair Labor Standard Act of 1938, the Supreme Court determined that the two phrases were synonymous, meaning that employees owed premium pay must be paid at their regular rate of pay.

The Supreme Court, however, didn’t just hold that regular rate of compensation and regular rate of pay are synonymous.  The Court went further and held that this determination should be applied retroactively.  What this means is that both current and former employees who previously received premium pay for missed meal and/or rest breaks from their employers based on their standard hourly wages are owed wages from their current employers.  What remains to be seen is whether these same former employers are also entitled to recover waiting time penalties for any underpaid meal and/or rest break premiums.  As a refresher, “waiting time penalties” are equal to the amount of the employee’s daily rate of pay for each day the wages remain unpaid, up to a maximum of 30 days, and accrue when a separated employee fails to receive all of his/her final wages on their final day of employment.  For example, if an employee earning $10 per hour and working eight hours a day fails to receive his or her final wages, they can accrue up to a maximum of $2,400 in waiting time penalties ($10 per hour x 8 hours per day x 30 days).

While the California Court of Appeal in Naranjo v. Spectrum Security Services previously held that a failure to provide premium pay does not trigger a right to waiting time penalties, this decision is currently up for review before the California Supreme Court.  If the Supreme Court were to reverse the Court of Appeal’s decision in Naranjo then the Court’s current decision in Ferra becomes that much worse (and potentially expensive) for California employers.

Given this ruling, California employers should immediately review their payroll policies to ensure that any employees receiving meal and/or rest break premiums are paid those premiums based upon their regular rate of pay rather than their standard hourly wage.  They should also immediately take steps to determine what (if any) underpaid amounts are owed to former employees.  Let the class action litigation begin.