California has long required meal and rest periods for hourly employees. The requirement was virtually ignored for many years because failure to provide breaks resulted in almost no penalties. This changed in 2000 after the state legislature mandated one-hour “wage” penalties for each day an employer fails to provide meal or rest periods as required. Since then, employers have faced up to two penalties each day payable at an employee’s “regular rate of compensation.”
Under Labor Code section 226.7 and state “wage orders,” employees who miss a meal period, rest period, or recovery period (a cooldown period afforded to employees to prevent heat illness) are entitled to an additional hour of pay at the employee’s “regular rate of compensation.” This is often called a “Wage Penalty.”
Calculating the “regular rate of compensation” can be confusing for employers. On the one hand, “regular rate” could mean an employee’s usual base hourly wage – which is the rule many employers followed for years. On the other hand, it could mean an employee’s “regular rate of pay” as used for calculating overtime under state and federal law, which requires that an employee’s base rate be increased to reflect other types of pay such as differentials and incentive bonuses. This conflict confused employers for decades until the California Supreme Court held that employers must use the broader definition of “regular rate” when calculating Wage Penalties.
This makes a big difference. When calculating amounts due to an employee, employers must include hourly pay and non-discretionary payments such as shift differentials, incentive bonuses, and other compensation beyond base hourly rate. This should be a familiar calculation, as it is the same formula used for calculating “regular rate” for overtime premiums.
One example could be an employee working at a winery for 20 hours at $15.00 per hour, but who also receives a $25 bonus for wine club signups. Her usual base wage is $15.00 but her ‘regular rate’ is $16.25 ($15.00 x 20 hours plus $25 [$325], divided by the 20 hours worked). If she missed two rest periods and one meal period that week, but was paid only $45 in Wage Penalties, she would have been underpaid $3.75.
This small difference can have a huge impact, as underpaid Wage Penalties may result in an overall wage underpayment when employees are terminated. If so, the “waiting time” penalty for a single underpayment (under Labor Code section 203) could be up to 30 times an employee’s average daily pay. (And this is in addition to other potential Labor Code penalties as well!)
Employers should keep this “regular rate” issue in mind when calculating missed meal and rest period premiums. Heads up: the issue applies in other situations, such as sick pay calculations, as well.