California employers know that non-exempt employees are entitled to meal and rest premiums when such employees are unable to timely take an interrupted meal or rest period. California employers already know how costly these premiums can be. Recently, however, the California Supreme Court upped those costs by ruling that meal-or-rest-period premiums must take into account any and all non-discretionary payments (i.e., payments that an employer owes an employee pursuant to a contract, agreement, or promise) that an employee earns and receives over a pay period. In other words, meal-or-rest-period premiums are no longer payable at the employee’s “normal” hourly wage (we will see this below). To add insult to injury, the California Supreme Court ruled that its decision applies retroactively to meal or rest premiums that were incurred even before its decision came out last week.
A hypothetical will help illustrate this. Suppose that non-exempt Employee A earns $20.00/hour and works a 40-hour pay period, but also earns $15.00 for each item (say, a table) assembled. Suppose that Employee A makes 10 tables in that same pay period but misses a required meal or rest period. Now, in this case—critically—Employee A’s meal or rest period premium pay will not be the $20.00 per hour that Employee A “normally” makes. Rather, per the Court’s ruling, the premium will be $23.75, arrived at in this way: [($20.00/hour x 40 hours) +($15.00/item x 10 items assembled in pay period)] divided by 40-hours in that pay period.
See the difference? Before the Court’s ruling, Employee A’s premium pay was $20.00/hour, reflecting the employee’s “normal” hourly wage of $20.00. After the Court’s ruling, it has increased to $23.75 to account for all of the nondiscretionary pay (again, pay earned via contract) that Employee A was entitled to in that corresponding pay period. The fact that Employee A likely would assemble a different number of items from pay-period-to-pay-period does not affect this result.
How could employers respond to legal development?
First, employers must increasingly monitor their employees’ compliance with mandatory meal and rest periods. Simply put, meal or rest break premiums result in draconian payouts—and ever more so in light of the Court’s latest ruling.
Second, employers should perform an audit of their meal and rest break premium payouts for the past three years (that is the statute of limitations period for meal and rest premium claims) and determine if they need to “true up” any premium payouts to their employees (i.e., pay employees more, taking into account non-discretionary payments that the employee earned over each pay period).
Third, employers should re-assess any non-discretionary payments they offer and consider scrapping them in view of the administrative and practical difficulties that the Court’s decision undoubtedly will impose on employers.
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