On July 15, 2021, the Supreme Court of California held in Ferra vs. Loews that employers must calculate employees premium pay for noncompliant meal, rest, or recovery periods just like it does for overtime —at their regular rate of pay, which includes hourly wages and nondiscretionary payments. Nondiscretionary payments are payments for an employee’s work that are owed under a prior contract, agreement, or promise, and are not determined at the employer’s sole discretion.

According to the court, “Under California law, employers must provide employees with overtime pay when employees work more than a certain amount of time. To calculate overtime pay, Cal. Labor Code § 510(a) requires an employer to compensate an employee by a multiple of the employee’s “regular rate of pay.” California law also provides for meal, rest, and recovery periods. If an employer does not provide an employee with a compliant meal, rest, or recovery period, Cal. Labor Code § 226.7, requires them to pay the employee one additional hour of pay at the employee’s regular rate of compensation.”

The court held that the state’s overtime law standard of “regular rate of pay” is the same as the meal and rest period law standard of “regular rate of compensation.” The court also analyzed related Industrial Wage Orders and came to the same conclusion—the terms are synonymous.

In this case, and how this all applies, an hourly employee was not provided with a legally compliant meal or rest period. So the employer was required to pay the employee for one additional hour (premium rate) and it did. But the employer didn’t add the employee’s quarterly incentive payments (a nondiscretionary bonus) to their hourly wage to calculate their premium rate and should have. As a result, and under this decision, the employer didn’t pay the employee correctly and isn’t compliant with California law. The takeaway from this case is that employers should ensure they are paying employees for noncompliant meal and rest periods at their regular rate of pay, which includes nondiscretionary bonuses, and not just their hourly rate.