On July 15, 2021, the California Supreme Court issued a new decision regarding penalty pay calculations. Under the decision, employers must use the same method to determine regular rate of compensation for penalty pay as they do to determine the regular rate of pay used for overtime calculations.
Read on to learn more about the ruling and what it means for your business.
Historical Penalty Pay Interpretation
For years, California wage orders have required employers who deny statutory meal or rest periods to nonexempt employees to compensate these workers with penalty pay. This is equal to one hour of their “regular rate of compensation.”
During that time, there has been some grey area around the definition of “regular rate of compensation”. Some employers have interpreted this as an employee’s base hourly rate of pay. Meanwhile, others have used the “regular rate of pay” used for calculating overtime.
California Supreme Court Ruling
Now, the California Supreme Court has settled the matter definitively in a unanimous decision. Regular rate of compensation means the same thing as regular rate of pay.
Therefore, when an employer calculates how much an employee is owed for a missed meal or rest period, they must also factor in nondiscretionary income the employee earns, such as:
- Production bonuses
- Piece rate pay
Notably, this does not include discretionary bonuses or tips. However, it does include mandatory service charges charged by restaurants that are distributed to employees.
Application of the Ruling
The court’s decision is retroactive. This means that employees who earn additional non-discretionary pay and received penalty pay in the past that didn’t factor in that additional non-discretionary pay will be within their rights to ask their employer for an adjustment.
The statute of limitations for wage and hour claims in California is generally three years. Therefore, if the court’s ruling is contrary to your longstanding practices, it could introduce significant liability. If you anticipate such requests, we recommend that you speak with an attorney about how to handle them.
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