California Supreme Court Holds That Failing to Pay and Account for Missed Meal and Rest Periods Has A Cascade of Financial Consequences

Historically, California employers have been challenged to comply with detailed, and often changing, wage and hour statutes and regulations.  Matters such as determining when and how to provide eligible employees with required rest and meal periods, and how to account for compliance, constantly evolve.  Recently, the legal landscape got a bit more challenging for employers following a decision by the California Supreme Court entitled, Naranjo v. Spectrum Security Services, Inc., issued on May 23, 2022.  The Naranjo decision, along with two other recent Supreme Court decisions, reinforce the need for employers to re-examine their timekeeping systems to ensure strict compliance with wage and hour regulations in order to avoid the myriad of additional pay, interest and penalty obligations imposed for violations.  This article will review recent court decisions and their impact on California employers, along with providing recommendations to minimize the risks of meal and rest periods violations.  

 Compensation Paid or Owed for Missed or Late Breaks 

The Supreme Court held in Naranjo that the one-hour compensation owed to employees who missed or had non-compliant meal or rest breaks (“premium pay”) constitute both an incentive to employers to comply with meal and rest period obligations, and also wages reflecting time that employees worked while otherwise entitled to be on a break.  Further, the Court determined that employers who do not accurately report the one hour of premium pay earned, whether paid or not, on employee wage statements become exposed to penalties under Labor Code Section 226(e)(1), as well as “waiting time” penalties under Labor Code Section 203 if those “wages” were not paid to employees when their employment ended.  

In Naranjo, a security guard brought a class action lawsuit on behalf of all similarly situated security guards against Spectrum Security, his employer, based on the fact that they were required to have “on-duty” meals, because of the nature of their job duties, but never signed written “on-duty meal” agreements, as required by law. Hence, Spectrum had not complied with on-duty meal period requirements.  One issue addressed by the Supreme Court was whether the one hour premium pay the law required to be paid to employees should be treated as a wage or penalty.  If they were to be treated as wages, then those “wages” must be accurately reflected in employee wage statements (aka “pay stubs”) and paid when earned.  While clearly these payments were intended to act as an incentive for employers to ensure that timely and full meal and rest breaks would be provided, the Court held that premium pay also compensated employees for work performed during the break period and should also be considered “wages.”

Since on-duty meals were not authorized by a signed written agreement, as required by law, Naranjo’s employer became exposed to liability for wages owed for (1) not having paid required one hour of premium pay to its employees, and (2) not having identified on employee wage statements that the premium pay earned during each payroll period.  Labor Code Section 226(e)(1) provides penalties of the greater of actual damages suffered, or $50 for the initial payroll violation and $100 for each subsequent violation, up to $4,000 per employee, for “knowing and intentional” violations, along with an award of reasonable attorneys’ fees and costs.

Additionally, an employer may also be exposed to waiting time penalties under Labor Code Section 203.  Employers are required to pay an employee immediately all wages owed upon termination, or within 72 hours if the employee resigns without prior notice.  Since the Court determined that the compensation owed for meal period violations was a wage, employers also became exposed to waiting time penalties under Labor Code Section 203 if those wages had not been paid by the time an employee’s employment ended.  Section 203 penalties are significant.  When employers fail to pay all wages owed by the time an employee is terminated, in addition to those wages, employers must pay the employee one day’s wages, for each day all wages are not paid in full, for up to 30 days.  In other words, a very substantial sum of money.  

Finally, the Court in Naranjo determined that interest accrued on the unpaid wages at the rate of 7% per annum (instead of the lower Court’s determination of 10% per annum) from the time the premium pay should have been paid.  Depending upon the nature of the legal theory, a three or four year statute of limitations would apply, with interest accruing at 7% per year, until the affected employee receives all the premium pay he or she was entitled to receive.

 Premium Pay Can Be More Than the Employee’s Hourly Rate

Labor Code Section 226.7(c) requires employers provide employees an additional hour of pay (the premium pay) if employees are not provided an opportunity to take a meal or rest break in compliance with the governing wage order.  The extra hour of premium pay is to be calculated at the employee’s “regular rate of compensation” for each work day a meal or rest break is not provided.  The California Supreme Court determined last year that the “regular rate of pay” should include non-discretionary commissions, bonuses and incentives, in addition to an employee’s regular hourly wage.  Ferra v. Lowes Hollywood Hotel, LLC, decided July 15, 2021.  Therefore, commissions, non-discretionary bonuses and even shift differentials must be included in the “regular rate of pay” calculation when employers determine the one hour of “premium pay” that is owed to an employee for non-compliant meal or rest breaks. 

Many employers have conscientiously tried to track meal and rest periods, and pay employees when violations occur, but often times employers have taken a simplistic approach of just paying an additional one hour of the employee’s hourly rate. But, in order to be compliant, employers must also consider other compensation paid during the payroll period, including commissions, non-discretionary bonuses and shift differentials when calculating the “regular rate of compensation” to be paid for missed meal and rest periods.

Rounding of Time for Meal Periods is Not Permitted: Strict Compliance is Required

Perhaps the most impactful recent decision by the California Supreme Court regarding meal periods is its decision in Donohue v. AMN Services, LLC, decided February 25, 2021.  In Donohue, AMN,a healthcare services and staffing company that recruits nurses for temporary contract assignments, was sued in a class action on behalf of recruiters for meal period violations.  AMN’smeal period policies and trainings seemed almost in every way to comply with applicable law—almost.  AMN’s policy emphasized that the meal period was an “uninterrupted 30-minute” break, during which employees were “relieved of all job duties,” were “free to leave the office site,” and were free from any control by AMN Services.  Further, the written policy provided that meal periods had to begin no later than the end of the fifth hour of work.  The written policy also specified that AMN supervisors should not “impede or discourage team members from taking their break.”  However, AMN’stime tracking system rounded time to the nearest 10-minute increments—a not uncommon employer practice which, if neutral on its face and as it is applied, is permitted for employees’ clock in and clock out times. 

Nonetheless, the Supreme Court in Donohue held that employers cannot engage in the practice of rounding time punches in determining whether compliant meal periods were provided—that is, adjusting the hours that employees have actually worked to the nearest preset time increment. The Supreme Court was unimpressed by the testimony of AMN’s expert, who testified that the rounding of meal period times, evened out over time, which actually resulted in an over-compensation of the class members by 85 work hours, and that the average length of a meal period was actually more than 45 minutes in length.  Therefore, ANM argued that no actual harm was suffered by its employees.

The Supreme Court held that meal periods are designed to prevent even “minor infringements on meal period requirements,” and rounding is incompatible with that objective.  The Court also held that if time records show non-compliant meal periods, it will raise a rebuttable presumption that meal period violations have occurred.  The Court gave an example if an employee clocked out for lunch at 11:02 a.m., and clocked in after lunch at 11:25 a.m., the record tracking system would have recorded the time punches as 11:00 a.m. and 11:30 a.m., although the actual meal period was only 23 minutes long.  Similarly, if an employee clocked in for work at 6:59 a.m., and clocked out for lunch at 12:04 p.m., the time tracking would have rounded the time to 7:00 a.m. and 12:00 p.m.  But in that case, the actual meal period started 5 hours and 5 minutes after the employee began working.  Yet, the time tracking system would have recorded the meal period as starting exactly 5 hours after the employee began work.  

The Court held that the time requirements set out in the Labor Code and applicable wage orders—”not less than 30 minutes” and “5 hours per day,” (and similar second meal period requirements for “10 hours per day”) were incompatible with the imprecise calculation of rounding time.  The Court determined that while rounding time punches to calculate regular and overtime wages may be appropriate, as this arrangement often averages out so that the employees are fully compensated for all time they actually worked, it is not an acceptable practice in regard to meal period calculations. The meal period statutes establish that, no matter how minor the infraction, employers must provide a minimum 30 minute meal period, which begins no later than the end of the fifth hour of work, or the meal periods will be considered as non-compliant.

  The Court noted that forcing employees to work through their meal periods not only causes economic burdens in the form of extra work, but also non-economic burdens on the employees’ health, safety and well-being.  The Court held that shortening or delaying a meal period, by even a few minutes, may exacerbate risks associated with stress or fatigue and, within a 30-minute timeframe, a few minutes can make a significant difference in eating an unhurried meal, scheduling a doctor’s appointment, getting instructions to a babysitter, or simply resting before going back to work.

Finally, the Donohue court held if the time records show non-compliant meal periods, a rebuttable presumption of liability is created. While employers can seek to introduce evidence that rebuts this presumption (i.e., an employee voluntarily chose to end a meal period before 30 minutes had elapsed), it becomes a significant burden, in most occasions, for employers to overcome this presumption.  The Court emphasized that employers need to ensure meal periods are accurately reflected in employees’ time records.  If not, a presumption will arise that the employee was not relieved of duty during the meal period, and that instead a non-compliant meal period was provided.  

 What Should Employers Do?

First, all California employers should re-examine their time-keeping systems to ensure exact times are calculated for meal periods, and that times are not rounded.  Further, time-keeping systems should automatically calculate and provide for premium pay when non-compliant meal periods occur.  Employers should ensure that the one-hour of premium pay is calculated at the regular rate of compensation that includes not only the regular hourly wage, but also non-discretionary bonuses, commissions and incentives, that are paid during the particular pay period.  

Employers must ensure that written policies exist that notify employees that they are entitled to timely take, and fully complete, duty-free 30-minute meal periods, which must begin before the end of the fifth hour of work.  Policies should provide that no manager or supervisor should interfere with or discourage employees from timely taking their meal or rest periods, and to report to management if anyone attempts to contravene this policy.  Annual or periodic written reminders to employees should also be considered, as it will help establish that any shorten meal or rest periods taken by an employee was voluntary, and that the employer “provided” a reasonable opportunity to timely take full meal and rest periods.  It is also recommended, when it is feasible or appropriate, to create meal period schedules that assign meal periods to employees that begin at least 15 minutes before the end of the fifth hour of work.  This will help avoid the inevitable last minute delays in clocking out for lunch that can otherwise create premium pay liability.  

Finally, extra caution is warranted.  Labor Code section 558.1 provides a serious incentive for owners, directors, officers and managing agents of businesses to ensure compliance with meal and rest period obligations.  Any employer, “or other person acting on behalf of the employer, who violates or causes to violate. . . . .” meal or rest periods, and delays in paying final wages owed, “may be held liable as the employer for such violations.”  Thus, personal liability may attach to individual managers for meal and rest period, and other enumerated wage and hour, violations.

In days gone by, fair-minded employers often gave employees latitude about the timing and length of taking meal periods. It often was agreeable to both the employer and its employees. However, in today’s world, California employers must focus on strict adherence to wage and hour regulations, as even minor infractions will create substantial financial consequences.  Our Supreme Court has made clear that wage and hour regulations are intended to protect employees, and meal and rest periods will be strictly enforced.  Employers must review seriously their timekeeping systems and make sure that they comply with the recent pronouncements of the Supreme Court clarifying employer meal and rest period obligations.