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Monday, 23 September 2013 15:34

Update: Averaging Piece-Rate Pay May Not Meet Wage Requirements in California

Under federal law, employers can meet minimum wage requirements for piece-rate workers by paying them enough so that their total pay meets the minimum wage, on average, for the hours they work in a work week, regardless of whether each hour was productive. But now the California Court of Appeal says that’s not true in California.

In Gonzalez v. Downtown LA Motors, the Court of Appeal held that employers who pay on a piece-rate basis for certain compensable tasks must also pay a separate minimum wage for non-productive time spent between those tasks.

In April of 2013, the California Court of Appeal decided automobile service technicians should be paid while waiting between jobs. The court held that the technicians, who were paid on a “piece-rate” basis, must also be paid at least the minimum hourly wage for the time that they are required to wait between their piece-rate paid repair jobs. The California Court of Appeal case held that piece-rate-paid employees are entitled to separate hourly pay for “waiting” time.

On July 19, the California Supreme Court refused to review the appeal court ruling, making it binding precedent. (Gonzalez v. Downtown LA Motors, LP, B235292, April 2, 2013). In its ruling, the Court of Appeal noted that California law requires that employees be paid “not less than the applicable minimum wage for all hours worked in the payroll period, whether the remuneration is measured by time, piece, commission, or otherwise.”

In its decision, the appellate court noted that California law  provides: “Every employer shall pay to each employee, on the established payday for the period involved, not less than the applicable minimum wage for all hours worked in the payroll period, whether the remuneration is measured by time, piece, commission, or otherwise.”

This requirement really means, the court ruled, that the minimum hourly wage must be paid for each and every hour worked, no matter how the employee is normally compensated. This means that employers can no longer show that the required minimum wage has been paid by averaging the total compensation over the total number of hours worked in the pay period as permitted by the Fair Labor Standards Act (FLSA) and all other states.

“Hours worked” is defined as “the time during which an employee is subject to the control of an employer, and includes all the time the employee is suffered or permitted to work, whether or not required to do so.”

Downtown LA Motors (DTLA) had argued that its method of paying technicians complied with the plain language of the wage order because under the pay agreement technicians were paid “not less than” the applicable minimum wage for “all hours worked,” and that compliance was achieved by paying the difference if a technician’s piece compensation for all hours on the clock fell below the applicable minimum wage.

The court noted:  “Under DTLA’s flag hour system, technicians earn significantly more by working on cars than waiting for vehicles to repair.  They will still have the financial incentive to accrue flag hours in order to increase their earnings.” DTLA technicians accrue flag hours only when working on a repair order.

But the technicians argued that public policy does not permit piece-rate wages to be averaged across the waiting time in satisfying the minimum wage because the term “all hours worked” really means “each and every hour” worked only on piece-rate work, and that technicians should have been paid separately, at the applicable minimum wage, for “each and every” hour of time on the non-piece rate work or time spent waiting for repair work.

The appellate court held the general rule that “employers must pay for all hours worked and may not average paid, productive hours with non-paid, non-productive hours” applies to piece-rate employees.  Therefore, the class of technicians was “entitled to separate hourly compensation for time spent waiting for repair work or performing other non-repair tasks directed by the employer during their work shifts.”

Federal District Court Concurs

This requirement of the California courts for piece-rate compensated workers was also recently adopted by a federal district court in a trucking case. Con-Way Freight v. Quezada, 3:09-cv-03670-JSW (June 27, 2013). In that case, the court held that drivers who were paid a piece-rate based on a pre-set mileage rate and who were also paid on an hourly rate for work performed such as loading and unloading had not been paid any wages for certain non-driving tasks, such as vehicle inspections and some waiting time at each stop.

This time spent on non-driving tasks is time that the company had contended was properly included in the piece-rate compensation system. As in the Downtown LA Motors case, the court ruled that California law required that this non-driving time be paid at a separate hourly rate, equal to at least the minimum wage.


Court Applies Rule to Commission Sales

Late last year, a similar result was reached as to commissioned salespersons. In Balasanyan v. Nordstrom, a federal trial court held that hours spent in non-sales activities were uncompensated because “compensation must be directly tied to the activity being done, whether it is selling on commission or preparing to sell on commission,” and that “activities only indirectly related to sales or services must also be compensated.”

Nordstrom commission-paid salespersons were required to engage in stocking, pre-opening, and post-closing activities. The court held that those hours were uncompensated because “compensation must be directly tied to the activity being done, whether it is selling on commission or preparing to sell on commission,” and that “activities only indirectly related to sales or services must also be compensated.”

These cases may have a profound impact upon all commission sales work in that the plaintiffs had contended, and the court appeared to agree, that “stocking” time includes all time other than face-to-face customer interaction work, which would make all such time separately compensable on an hourly basis. In a footnote to these cases, the district court indicated that it felt it was constrained by California law to reach this “peculiar result,” which “forces employers to craft hybrid compensation systems for commissioned employees where they are also paying employees per hour for any activity that is not directly related to earning a commission, even when that activity might assist in generating future profits.”

As a consequence of these decision, all California employers who pay employees on a piece rate or commission basis, including flat-rate technicians and salespersons, should review their pay plans to mitigate the risks posed by the Gonzalez v. Downtown LA Motors and Balasanyan decisions.

California employers paying on a piece-rate or commission basis must consider revamping their pay systems to separately pay the minimum wage rate for hours during which employees are subject to the employer’s control and not earning a piece rate or commission.

You can no longer divide piece work pay by total hours worked and assume you are in compliance with the law as long as the resulting hourly rate for all time at the shop is higher than minimum wage. Instead, start with hours at the job and pay minimum wage (or more) for all hours at the site, then pay a bonus based on the piece rate or other performance criteria.

At a minimum, attorneys consulted on this issue recommend:

● Consulting qualified labor and employment counsel to determine whether piece rate and commission pay plans require modification, and whether any other action is appropriate to mitigate risk based on the Gonzalez (DTLA) and Balasanyan (Nordstrom) cases.

● Modifying piece rate and commission compensation to avoid so-called “uncompensated” hours, but paying at least minimum wage directly for each hour worked (including non-flag work and work indirectly related to sales, such as moving cars or participating in team meetings);

● Reviewing and modifying itemized pay statements to ensure compliance with Labor Code section 226, which requires pay statements to show information, including total hours worked by employees, the number of piece rate units earned and any applicable piece rate, and all applicable hourly rates in effect during the pay period and the corresponding number of hours worked.

● Employers should also consider implementing arbitration agreements to control exposure to class-action lawsuits.


Additional Case Denied Review by Supreme Court Review

One chance for review of the issues related (to the requirement that minimum wages be paid for each and every hour worked by employees who are currently compensated on piece-rate and commission systems) was petitioned by the U.S. Chamber of Commerce to the California Supreme Court in late July, but the Court has since declined to hear the case.

That case is Bluford v. Safeway Stores, Inc., C066074 (May 24, 2013). The U.S. Chamber of Commerce urged the California Supreme Court to grant the petition for review. The Chamber argued that this case is yet another employment dispute in which a Court of Appeal superimposed rules developed in the wage-and-hour context on a different compensation system.  Here, the appeals court held that an employer using a productivity compensation system must separately compensate piece-rate workers at the minimum hourly wage for the two 10-minute rest breaks per day that must be authorized and permitted by their employers under California law. Prior to this decision, such rest breaks had always been permitted to be included as part of piece-rate and commission plans.

Now the only option for bringing California law in line with the Federal Wage statute is the California Legislature taking action. Efforts are underway to engineer a bill on this matter.

This article is for informational purposes only and should not be considered as any form of legal advice. Always consult a qualified attorney before acting on any such news-based information.

See previous story on Gonzalez v. Downtown Motors.

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