California High Court Rules Missed Break Premiums Are ‘Wages’

On May 23, 2022, the Supreme Court of California held that premium pay for missed meal and rest periods constitutes “wages” under California labor law and that employers may be held liable for the failure to properly report and timely pay out such wages.

The unanimous California high court in Naranjo v. Spectrum Security Services, Inc. found that such premium pay must be reported on statutorily required wage statements under California Labor Code section 226. The court further held that such unpaid premium pay must be paid within statutory deadlines when an employee leaves a job and that employers may face potential liability for waiting time penalties under California Labor Code section 203.

The case involved a class action filed by security guards alleging that Spectrum Security Services had violated California labor law by failing to report the premium pay for missed meal breaks on employees’ wage statements and failed to timely provide the pay upon employees’ discharge or resignation. A California appellate court had held that missed-break premium pay was not “wages” because it serves as a legal remedy, not compensation for work, and that employers cannot be penalized for the failure to timely pay or report.

The state’s high court reversed, reasoning that while the extra pay is designed to compensate for what is an unlawful deprivation of a guaranteed break, it is also compensation for work an employee performed during that break period. Therefore, the pay constitutes wages subject to the same timing and reporting rules as other forms of compensation for work, the court said.

Additionally, the California high court held that the rate of prejudgment interest that applies to amounts due for failure to provide meal and rest breaks is the 7 percent default rate set by the California Constitution.

Key Takeaways

The impact of this decision is substantial. The following example provides an illustration of the decision’s potential breadth. If, for example, an employee’s base pay were $20 per hour, and on a single shift the employee received a twenty-nine-minute meal period (one minute short of compliant), the employee might be entitled to all of the following: (a) at least $20 due as the premium (and potentially more if the employee received incentive pay and the regular rate was higher than the base rate); (b) if the payment was not recorded correctly on the wage statement, an additional $50 under Labor Code section 226; (c) if the employer failed to timely pay the premium, or failed to pay it at the regular rate, and the employee departed from employment, an additional thirty working days of pay under Labor Code section 203; and (d) if a California Private Attorneys General (PAGA) claim were asserted for failing to pay wages, the employee might also be entitled to an additional $100 as a civil penalty. As such, under this example, a single, noncompliant meal period would result in more than $5,000 in statutory and civil penalties, as well as prejudgment interest at a rate of 7 percent.

This is the third recent decision from the California Supreme Court raising the liability to employers for meal and rest break violations. First, on February 25, 2021, the court in Donohue v. AMN Services, LLC decided that meal period time records could not be rounded and that a rebuttal presumption of a violation applied to discrepancies in such records (showing meal periods as short, late, or missed). Then, on July 15, 2021, the court issued a decision in Ferra v. Loews Hollywood Hotel, LLC, unanimously holding that employers must pay premium payments to employees for missed meal, rest, and recovery breaks at the employee’s “regular rate of pay” instead of their base hourly rates. And now, in Naranjo v. Spectrum Security Services, Inc., the court has designated the premium payments as wages that must be paid timely with interest and included on the wage statement, or strict penalties may apply.

Employers may want to consider updating and reinforcing their meal and rest period policies, and premium payment systems, to ensure prompt payment of premiums at the regular rate and the recording of such payments on wage statements. These efforts may include the following:

• Providing new training for all nonexempt employees that taking meal and rest periods is a priority, and requiring employees to take their breaks
• Reinforcing meal-period waiver forms for eligible first and second meal periods
• Providing employees the opportunity at the end of each shift to confirm (i.e., attest) that they received their compliant meal and rest period opportunities for that shift
• Training payroll and human resources personnel that premiums are wages that must be promptly paid at the regular rate and reported on the next wage statement
• Making restitutionary “true-up” payments for meal and rest break premiums at the regular rate of pay, as the Ferra decision held that the regular rate requirement applies retroactively
• Modifying or eliminating incentive compensation for nonexempt employees, so that premiums may be simply paid at the base hourly rate of pay
• Providing employees with a system specifically for meal and rest period compliance and directing any related complaints to a gatekeeper who investigates and documents such complaints, ensures premium payments when applicable, and regularly audits the company’s compliance record.

The Naranjo ruling answers several questions surrounding the treatment of pay for meal breaks and pay deadlines, and it may open up employers to liability for failure to timely pay premium wages for missed meal breaks.

Ogletree Deakins will continue to monitor California employment law developments post updates on the firm’s California and Wage and Hour blogs. Important information for employers is also available via the firm’s webinar and podcast programs.