Must Employers Include Meal-Period Premium Payments in the “Regular Rate” Used to Compute the Overtime Owed to Their Employees?

February 26, 2009

On February 25, 2009, Judge Saundra B. Armstrong of the U.S. District Court for the Northern District of California resolved a novel question of federal labor law of significant import for employers in California by holding, in the context of a putative state-wide class-action in Rubin v. Wal-Mart Stores, Inc., No. CV 08-4214, that when determining the "regular rate" used to calculate an employee’s overtime compensation under the federal Fair Labor Standards Act (FLSA), 29 U.S.C. § 201 et seq., meal-period premiums mandated by California Labor Code Section 226.7 need not be included in that rate. 

Federal law requires that employees who work more than forty hours per week be paid an overtime premium.  29 U.S.C. § 207(a)(1).  To determine the amount of that premium, employers must multiply the employee’s pay rate by his or her overtime hours, and multiply that product by one and one half.  Id.  An employee’s pay rate, or "regular rate," is calculated by dividing the employee’s compensation by the number of hours worked.  29 U.S.C. § 207(e).  The employee’s compensation for purposes of this calculation includes "all remuneration for employment."  Id.  "Remuneration" includes such things as cost-of-living allowances and promised bonuses, 29 C.F.R. §§ 778.110(b), 778.211(c), but does not include, for example, overtime pay, other payment at premium wage rates, discretionary bonuses, or gifts.  29 U.S.C. § 207(e)(1), (3)(a), (5)–(7); see also 29 C.F.R. §§ 778.108, 778.210, 778.211(a), 778.308–778.314.

The plaintiff in Rubin alleged that he received premium payments from the defendant pursuant to California Labor Code Section 226.7, which requires that an employee who is not "provid[ed]" with a thirty-minute unpaid meal period receive a premium payment equal to an hour’s worth of wages, and that this premium payment should have been considered "remuneration" and included in his overtime rate.  He alleged that he was paid overtime during a pay period in which he received one of these premium payments, that the premium was not included in his overtime rate, and that when the defendant calculated his overtime pay, the lower rate resulted in lower net overtime pay.  He brought this claim on behalf of himself and all of the defendant’s current and former employees in the State of California.

Judge Armstrong correctly rejected plaintiffs’ theory as a matter of law.  The federal regulations governing the calculation of overtime rates specify the payments made by employers to their employees that must be included in the overtime rate and those which an employer may exclude.  One section of the regulations, 29 C.F.R. § 778.202(d), allows employers to exclude "payment at premium rates . . . made pursuant to the requirements of [an] applicable statute."  The regulatory provision does not specify what is considered a "payment at [a] premium rate," or what is an "applicable statute." 

Judge Armstrong held that meal-period premiums under California Labor Code Section 226.7 fit this definition.  She relied on Judge Matz’s decision in Kamar v. Radioshack Corp., 2008 WL 2229166, *4 n.7 (C.D. Cal. May 15, 2008), which explained that "meal period pay" is "in the nature of [a] premium[] required by law, [and therefore need not be] included in computing the regular rate of pay," and on the same interpretation by the California Division of Labor Standards Enforcement, DLSE Enforcement Policies and Interpretations Manual, §  She also pointed to the California Supreme Court’s likening of meal-period premiums to overtime premiums (which are excluded from the regular rate), in Murphy v. Kenneth Cole Productions, Inc., 40 Cal. 4th 1094, 1108–09 (2007).  Judge Armstrong therefore held that plaintiff’s complaint, which included an overtime claim and multiple other causes of action derivative of that claim, did not state a valid claim under the FLSA, and dismissed it on the pleadings.  She also dismissed with prejudice plaintiff’s claim under California Labor Code Section 226, which alleged that the defendant had not included the "total hours" on the plaintiff’s pay stub, because the pay stub, attached as an exhibit to the complaint, plainly included totals for both "regular" and "overtime" pay, and the defendant was not also required to sum those totals together.

The Rubin decision is important, because it resolves the novel legal question of whether employers must include California meal-period premiums in the calculation of their employees’ overtime rates—a question that could be of significant financial import to employers defending class or individual actions brought on behalf of their current or former employees in California and other states with similar meal-period laws.

Gibson, Dunn & Crutcher LLP 

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn attorney with whom you work or any of the following:

Julian W. Poon – Los Angeles (213-229-7758, [email protected])

Labor and Employment Practice Group
Eugene Scalia – Washington, D.C. (202-955-8206, [email protected])
William J. Kilberg P.C. – Washington, D.C. (202-955-8573, [email protected])
Pamela Hemminger – Los Angeles (213-229-7274, [email protected])
Scott A. Kruse – Los Angeles (213-229-7970, [email protected]
William D. Claster – Orange County (949-451-3804, [email protected]
Christopher J. Martin – Palo Alto (650-849-5305, [email protected])

Class Action and Complex Litigation Practice Group
Gail E. Lees – Los Angeles (213-229-7163, [email protected])
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G. Charles Nierlich – San Francisco (415-393-8239), [email protected])  

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