California Court of Appeal Clarifies Meal and Rest Period Premium Calculation and the Enforceability of Rounding Policies

California employers have long grappled with two wage and hour questions:

1. What rate of pay should be used to calculate meal and rest period premiums in California?
2. Does the facially neutral “rounding” of employee work time, which results in a small subset of employees being undercompensated, result in systematic undercompensation on a class-wide basis?

On October 9, 2019, the California Court of Appeal weighed in on these issues in a favorable published opinion, Ferra v. Loews Hollywood Hotel, LLC, Case No. B283218.

Meal and Rest Period Premiums Should Be Paid at an Employee’s Base Rate of Pay

With respect to meal and rest period premiums, the Court of Appeal considered whether the phrase “regular rate of compensation” for calculating meal and rest period premiums under Labor Code § 226.7 has the same meaning as “regular rate of pay” for calculating overtime compensation under Labor Code § 510.

The Court of Appeal ruled that the two phrases have different meanings, and thus meal and rest period premiums should not be calculated in the same manner as overtime compensation. As a result, unlike overtime, meal and rest period premiums need only be paid at an employee’s base hourly rate, which may be lower than the employee’s regular rate for purposes of calculating overtime compensation.

Specifically, the Court of Appeal concluded that “equating ‘regular rate of pay’ and ‘regular rate of compensation’ would elide the difference between requiring an employer to pay overtime for the time an employee spends working more than 40 hours a week, which pays the employee for extra work, and requiring an employer to pay a premium for missed meal and rest hour periods, which compensates an employee for the loss of a benefit.”

In reaching this conclusion, the Court of Appeal first undertook an analysis of the plain language of the two different statutory provisions—“regular rate of compensation” versus “regular rate of pay.” The court found that “compensation” and “pay” are, indeed, different terms, and that the legislature made a conscious decision to use two different terms in the two different statutes, which were enacted in the same year.

The court also addressed the legislative history of the two statutes. Notably, the legislature’s occasional reference to similarities in the purpose of overtime pay and meal and rest period premiums (i.e., sometimes equating both to a penalty) did not require reaching the conclusion that the two types of payments should be calculated in the same way, especially in light of the choice to use different terms (i.e., “pay” versus “compensation”).

Facially Neutral Rounding Practices Do Not “Systematically Undercompensate” Employees, Even Where a “Small Majority” of Employees Lose Compensation

The Ferra court also considered whether the employer’s facially neutral rounding policy systematically undercompensated employees on a class-wide basis and found that it did not.

The plaintiff alleged that she and other putative class members were underpaid due to their employer’s practice of unlawfully shaving or rounding time from hours worked. Specifically, hourly employees clocked in and out using an electronic timekeeping system that automatically rounded entries either up or down to the nearest quarter-hour. According to the plaintiff, the rounding practice was further impacted by the company’s attendance policy, which included a “grace period”—seven minutes prior to the beginning of the shift and six minutes after the scheduled start time—to provide employees with flexibility when clocking in.

In the lower court, the plaintiff challenged the accuracy of the rounding data while simultaneously asserting the evidence clearly demonstrated that (1) she lost time due to rounding in 55.1 percent of her shifts; (2) she gained time in 22.8 percent of her shifts; and (3) the remaining shifts were not affected by rounding. For a sample group of hourly employees, she alleged the data showed: (1) in 54.6 percent of shifts, paid time was reduced; (2) in 26.4 percent of shifts, paid time was added; and (3) in 19 percent of shifts, paid time remained unaffected.

The Court of Appeal concluded that “[t]his is not sufficient to show that the rounding policy ‘systematically undercompensate[s] employees.’” Despite previous case law, in which rounding policies were considered facially neutral and the majority of employees were overcompensated, the court explained that “a ‘fair and neutral’ rounding policy does not require that employees be overcompensated, and a system can be fair and neutral even where a small majority loses compensation.”

Key Takeaways

Lower California courts are now obligated to follow the Ferra court’s logic in finding that meal and rest period premiums are appropriately paid at an employee’s base hourly rate. However, the question is also still pending before the Ninth Circuit Court of Appeal, which could come to a different conclusion or ask the Supreme Court of California to weigh in with a definitive determination.

While employers must still ensure that rounding policies are facially neutral and do not systematically undercompensate employees, they can breathe a sigh of relief that not all employees must be overcompensated or equally compensated for rounding practices to be considered lawful.