The Labor Code requires that an employer who “fails to provide a meal or rest or recovery period . . . shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each workday that the meal or rest or recovery period is not provided.” What does “regular rate of compensation” mean? The California Supreme Court just settled the matter in Ferra v. Loews Hollywood Hotel, LLC.

The employer (and the lower Court of Appeal) argued that “regular rate of compensation” meant the employee’s base hourly wage–i.e., what the employee would be paid for one hour of work. The plaintiff argued that it actually meant the same as “regular rate of pay” used in the context of calculating overtime, which would include adjustments to the base hourly wage for such things as shift differentials and nondiscretionary bonuses.

The California Supreme Court sided with the employee, holding that “regular rate of compensation” in the meal/rest premium context has the same meaning as “regular rate of pay” in the overtime context. The Supreme Court also ruled that its decision here applies retroactively, not just going forward.

Employers should review payroll processes to ensure compliance with this interpretation of regular rate of compensation. In addition to base hourly rate, meal and rest premium payments must take into account non-hourly forms of compensation, including commissions, piecework earnings, and nondiscretionary bonuses. Discretionary bonuses and tips do not need to be included, but restaurant employers who charge customers mandatory service charges that are then distributed to employees need to include those payments in calculating meal and rest premiums (and overtime). Employers who were paying premiums at the base hourly rate will also need to consider that the ruling applies retroactively and assess whether pay adjustments are necessary.