Episode 125: Court Rules on Meal Period Premium Pay

Welcome to the Workplace, a podcast by Cal Chamber. I'm Erica Frank, Calamber's executive vice president and general counsel. And joining me on the podcast today is Matt Roberts, one of Cal Chamber's employment law experts, as well as Ashley Hoffman, one of Cal Chambers Policy advocates, and Chris McKayley, who is also a policy advocate and also a frequent guest on the Cal Chamber Workplace podcast. Thank you all of you for joining me today. It's like a party today.

It is. We're excited.

Well, so am I because actually our listeners are really going to be interested in hearing today's podcast because we're talking about a very important California Supreme Court decision that just came down yesterday. So to put in perspective, dates and whatnot, today is Friday the 16th with the date we are recording. The California Supreme Court issued their ruling yesterday, July 15th. And that ruling is Fiera versus Lowe's Hollywood. And this case is a significant case as it relates to the meal and rest break premium payment. So many of our listeners are well aware that in California, our non exempt employees are entitled to meal and rest breaks throughout the day. And if the employer does not provide that rest break or does not provide the meal break, then they owe the employee premium pay. And under the labor code, premium pay is the equivalent of one hour of the employee's rate of compensation. Now, Matt's going to talk to us a little bit more about the case. But in essence and in a nutshell, the issue before the California Supreme Court was what does the rate of compensation mean? Does it mean the regular rate of pay that you are calculating overtime or is it simply that employee's base hourly rate? And I'm going to let Matt drop the bomb on what the California Supreme Court said and tell us a little bit about this case. Take it away, Matt.

Sure. Thanks for having me, Erica. So a little bit of background on this case. Ms. Farrow was a bartender with Lowe's Hollywood Hotel. As part of her compensation, she got a base hourly rate and then she got incentive payments on a quarterly basis based upon performance, essentially a non discret production bonus or incentive bonus for them. Anytime that Ms. Farah missed a rest or meal break, Lowe's would pay that premium pay that we know is due every time we have a rest and meal break violation. But Lowes would pay it based off of just that hourly rate that she was paid and didn't consider that quarterly incentive payment as part of the calculation for that. Basically judging that regular rate of compensation means just your straight hourly rate. Well, Ms. Farah, as part of a Class action sued her former employer, saying that they should have calculated those incentive payments as part of the premium pay for that bonus. And so she was actually under compensated for her meal period and rest period violations at both the trial and appellate court levels. They agreed with the employer, so saying that here in California, we have the term of art regular rate of pay, which is what we're very familiar with as the rate that we determine for overtime calculation purposes. And because the statute and the wage orders had said regular rate of compensation, well, they clearly meant something different because we know what regular rate of pay is. The legislature knows. And if they wanted to use regular rate of pay, they would have done so. So the trial court and the appellate courts both said it just means straight hourly rate. Lowe's did the right thing. Case dismissed. Well, the California Supreme Court took it up, of course, as we said, and issued their decision yesterday, holding that the term regular rate of compensation means exactly the same thing as regular rate of pay, pretty much attaching to that first part of the phrase, which is regular rate, which is what the federal standard uses for overtime calculations. And so the Supreme Court held that Lowe's should have been including those incentive payments that she received on a quarterly basis as part of the calculation for what her meal period and rest period premium should have been. And so Lowe's undercompensated her. And that's really the end of the story as far as this particular case goes. But definitely not the end of the story for employers.

No. And Matt, what's so fascinating and why I invited Chris and Ashley to join us today is.

Most of the California Supreme Court's opinion was about what the legislature intended when they used regular rate of compensation and normal statutory construction and the canons of interpretation. And the court even pointed out that we have district court cases that have said that this rate of compensation means base rate. Because they were looking at the standard that's typically used is that if the legislature intended for it to be regular rate of pay, they would have said so here. The Supreme Court really went back years when AB60 was passed. That was the bill that created the daily overtime in California. Look to see what the iwc, the Industrial Welfare Commission, which is no longer intact, what they were thinking, was there any guidance that we could find? Chris and Ashley, you have all been working in the legislature. You are there seeing how legislation is drafted, the types of debates that go on the floor. Be very interesting to get the two of your perspectives on this legislative intent and what the court did in this opinion, as far as really parsing out the intent and trying to find exactly, you know, what did the legislature want to do here?

Well, this is, this to me is.

A classic example of where the judicial branch of government tries to attribute legislative intent to the other branch of government without any realistic understanding of the legislative process. As you noted, a basic principle of statutory construction, as we say, is what is the plain language. And so you could easily argue, hey, there are two phrases that, that utilize similar language, regular rate of compensation and regular rate of pay. Regular rate is the same, but is there any difference between compensation and pay?

And then what I have found is that the judicial branch, first of all, it utilizes things like legislative intent when it fits.

Basically its determination what it's decided. And as you know from this case, the court said, hey, labor codes, statutory provision should be liberally construed in favor of the worker, right? Not the employer or the business, the worker. So if our end result is going to benefit the worker over the employer, and we're going to side with the employer, and so all the other arguments, what's the plain language? What's the intent of the legislature and their exploration of that stuff may or may not be necessary because they've already determined that any ambiguity in a labor code provision is going to be found to the benefit of the worker. And that's not to say one way or the other, if that's a good approach or a bad approach. I think the other problem that you have with ascertaining legislative intent is that they try to ascribe something to the legislature in its entirety. And as Ashley and I can ascribe to when bills hit the floor of the legislature, especially the last few weeks of the legislative session, when legislators are casting hundreds of votes every day, they really don't look at the gory details. They don't differentiate between, oh, wait, this bill says regular rate of compensation. Didn't other bills say regular rate of pay? They don't have the time or the ability to delve into the Gore details like that. So this notion that the entire legislature has a specific intent behind exact language is, in my mind, impossible to ascribe to the legislature entirely. We should instead rely more upon the author, for example, or the groups behind it. As Ashley and I know, it's often outside groups who end up negotiating the gory details of statutory language, not the entire legislature itself.

To build upon what Chris said, a lot of times amendments, especially to bills, are done between the author and the sponsor or the author and maybe negotiating with someone who is opposed to the bill or with a committee consultant before the bill is heard. And as Chris mentioned, it's not like it's the whole legislature looking at something and thoroughly debating it every time and deciding one word versus another. And so it can be really hard to actually know what was intended. And I think, as we know from this case, what the legislature seemed to intend here was, well, we want to copy the wage order. And it was the wage order that had this different word in it. And then maybe the question is, okay, they wanted to copy the wage order, but did they think about the fact that this word was different from regular rate of pay? I don't know. Without some sort of clear committee analysis or a letter to the journal or testimony or something, we don't know what the legislature was really thinking or what individual members were thinking when they cast their vote for or against the bill. So it's just really, I think, tricky to actually know what the legislature thought. Someone who kind of joined this policy world recently.

Now reading court cases like this, it's interesting to just actually kind of know how, I think how the sausage is made versus maybe how there's a perception of how it's made in the courts.

I'm sorry to interject. I think this is also an example of where.

These principles of statutory construction, as we all know.

There are ones on either side of the equation that courts can use. I mean, the fact, for example, that pay and compensation are used, Are they interchangeable or not? The court says at one point that there's no ambiguity, despite there being these two different phrases. Of course there's ambiguity. Now, to be fair, the legislature could resolve some of these types of ambiguities. That said, by using language such as, for purposes of this section, regular rate of pay means blank or regular rate of compensation means this.

So there are ways for the legislature to address these potential ambiguities, but for the court to say that there isn't necessarily any ambiguity there, and as Ashley noted, they go through and look at the history of the IWC's regulatory efforts and the wage orders. Well, that's great, except is the legislature, were they really aware when they were drafting the statute what that regulatory history at the IWC was? That's a big assumption for the court to make.

Yeah, I have to agree. And one of the things, though, that I think is a real key takeaway for our listeners today, especially for those who are trying to comply and follow the labor code and keep track of the statute and as laypeople, even as non attorneys or even attorneys for that matter, reading the statutes, wondering what did the legislature mean, Particularly when there's different interpretations, it's really easy for employers to get caught sideways and all of a sudden realize that they were misinterpreting a statute. And one of the lessons here, and it's something that the California Supreme Court has been repeating in prior rulings and in the ruling on this, this particular matter, and Chris, you alluded to it at the beginning, is the policy of the state is to err on the side of the employee. What is going to be most beneficial to the employee. So that's certainly something that employers may want to have in the back of their mind as they're trying to figure out on their own how to comply to some of these statutes and some of these regulations. The other thing that is very heartbreaking, if I so may use the word, is that the California Supreme Court here decided that their ruling, meaning that that premium pay must be paid at the regular rate of compensation, applies retroactively. This is a term of art that probably about six years ago, seven years ago, we really only talked about it in the context of court decisions, but particularly in this last year with COVID 19 and some of the urgency measures that we've seen, the term retroactive application has become a more normal term that's been used. And what that means is, well, employers, you should have always been paying that premium payment at the regular rate of compensation, and if you didn't, you could be exposed for not properly paying the premium pay. And Ashley and Chris, I don't know if you want to chime in on, you know, your experience in seeing this retroactive application and some of the statutes and some of the legislation that's been moving through.

Well, I think this is another, you know, when the Dynamex retroactivity court decision was handed down earlier this past spring, Ashley and I had several conversations about it in our frustration with the unanimous decision of the court, like here in this case as well, unanimous that.

Not only was it look to be fair to the courts generally, they view all of their decisions as having retroactive application because they're saying, hey, this is the way the law should have been interpreted from day one. And the fact that the statute was enacted 10 years ago, and we're saying now, 10 years later, this is the way it should have always been applied. I get that. The problem with that is it's devoid of any realism because oftentimes employers rely upon either guidance from one or more regulatory agencies or perhaps their own efforts to comply without any adverse consequences. To them until a court decision years later comes out. The court in this case also rejected the argument of the employer that this could be a very costly impact to the employer community. They also rejected that in the Dynamex retroactivity decision. And I'm a little bit personally disheartened that there wasn't a dissenting voice or two, or even three in this case, in the Lowe's case, nor in last spring's Dynamex retroactivity case that at least acknowledged the fact that the employer committee has long been operating under certain interpretations or applications of the law. And so to see that reliance, detrimental reliance by the employer to be so easily rejected by the high court, that I find disconcerting myself.

And I think something that's lost a lot on this court, as well as sometimes legislature in considering retroactivity is it's not just the fact that, yes, the court's right, this would mean that maybe some employees are now going to be owed some money, but what it really means for employers is susceptibility to penalties and lawsuits, which there's a great example in the amicus brief in this case that was filed by the U.S. chamber and others that says a small business who would now owe 20 extra cents would also be liable for Paga penalties. And there's another case coming up before the Supreme Court this year about whether meat meal and rest premiums are also then eligible for derivative penalties for failure to provide accurate wage statements and waiting time penalties. And if the court once again overturns the court of Appeals on that, that would mean that that small business would also be liable for 30 days of wages per employee is waiting time penalties, plus wage statement penalties, and plus on top of that, all the attorneys fees that they would owe for the inevitable class actions and lawsuits that are going to come from this. So I sometimes think there's not really an appreciation of the fact that, no, it doesn't just mean that maybe some employees will now be owed like a little bit more pay. There's, there needs to be some sort of protection then against using that to the kind of plaintiff's bar's advantage to then seek all these millions of dollars of penalties and fees on top of that, when the employer really didn't actually do anything wrong, they were just kind of following what they were probably told by legal counsel or potentially state agencies to what they were supposed to do.

I couldn't say that any better, Ashley. That was absolutely dead on and such a great segue to where I was going next, which is Sh. Shifting gears to Matt to talk about why is this important to employers and what should they be doing for that mere fact of the now potential exposure to liability? Because, like what we saw here in the Fiera vs Lowe's case, an employee saying, well, wait a second, you didn't calculate my pay. And for those who are wondering, typically speaking, the regular rate of pay is going to generate a higher hourly rate than just basing the payment on the employee's base rate. And that's because we're factoring in all those other forms of payment that the employee earned. And of course, we could do a whole nother separate podcast on what's included the regular rate of pay. But in a nutshell, that's why this is so significant. So, Matt, for employers who are listening to this today and going, oh, my God, I got to find out from payroll, how are we calculating the premium payment? What are some things that we could pass along to those who are listening to calm their nerves a little bit and give them a plan of action?

Yeah, absolutely, Erica. It was an awesome discussion from Chris and Ashley about the backgrounds and things of what happened with this case and really how the sausage gets made, which, you know, for legal nerds like us is pretty cool. But, you know, for employers, it is really, okay, what do I do now? What is this next step that I have to take? And really, the next step for employers to do is exactly what you said, Erica, which is we have to step into our payroll practices and we have to do it right away. The way wage and hour claims work is they work on this rolling statute of limitations, which means that if we have done something incorrect in the past based off of this court decision, then we need to at least correct it immediately to stop the clock on things going forward. And so what that means is we need to figure out, okay, anytime we've paid a rest or meal period violation, how have we been paying them that? Have we been using the regular rate of pay as our payroll service? Been doing that already for us? Have they just been taking their regular straight hourly rate? What's been happening there? And get that corrected as soon as possible. So if we've been using the base hourly rate and somebody gets other compensation in addition to that base hourly rate, such as flat sum bonuses, production bonuses, piece rate commissions, all these other things that would add on to their hourly rate, we need to make sure that we're capturing all that like we normally do for overtime, and make sure that that gets calculated into the. Into the meal and rest period premiums. That we end up paying going forward. Now, of course, we can't correct the past. And that's really what's so disheartening about this retroactivity and why it just feels fundamentally unfair for employers who have been relying on so many cases over the last several years that said straight hourly rate is appropriate is that we just can't fix what we've already been doing for the last several years. And as with any wage and hour issue that we find, either through our own practices, through our own audits, or because the law has changed via court decisions or through the legislature, it's always vital to get legal counsel involved first before you go jumping the wagon and doing anything else. For one thing, we want to make sure that we first figure out what is our exposure and liability at this stage, what is the best course for dealing with that. And there are always multiple options going forward. And then, of course, there's other technical requirements that we would need to complete in order to effectuate the change or cure the defect, as it's known in some cases with wage and hour and overtime payments and the like that we need to make sure we also have in hand. It's not just about giving them more money. It's also about having all the paperwork and documentation and agreements in hand as required under the Labor Code as well. So if we've discovered that, you know, we haven't been doing this properly in the past and we're worried about that exposure, get legal counsel on the phone first before we do anything, and get a plan of action in place to figure out how we want to address those past issues.

Okay, excellent. So hopefully that'll give our listeners just a place to start while they're digesting the information that we gave to all of them. And I think, as Ashley had pointed out, employer practices may have been based on what an agency had directed or what their own counsel may have directed. And as I mentioned earlier, but I'll mention it again, even the court, in its opinion, recognized that federal district courts and other appellate courts have actually found it opposite, saying that this regular rate, that the premium payment is the base hourly rate. So don't be too hard on yourselves out there if you're realizing that you were not applying the regular rate of pay, because this is certainly something that has been debated for several years since the statute was put into place. But with that being said, it is now clear there's no more disagreement. The California Supreme Court's the last word, and they have spoken loud and clearly. All of you, please take a moment to check out what your practices have been so that you can first a determine were you applying the regular rate of pay or not, and second, moving forward to make sure that you're doing it correctly and then thirdly assess your liability and work with legal counsel to determine what the next steps should or should not be. Well, thank you all for a fantastic conversation and really analysis of this Supreme Court case. I really appreciate all of your time today.

Thanks Erica for having us.

Thank you.

Thank you Erica.

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