Piece Rate Compensation Plans Under Fire

With new California “wage and hour” cases coming out almost daily one should not be surprised that many previously unchallenged well-established California employer wage and hour practices are now being called into question.  One of those practices is piece rate compensation.

What Is A Piece Rate?

Most employers pay employees either on an hourly, salary, or commission basis, or some combination thereof.  But some industries pay their workers on a “piece rate” basis.

A piece rate system pays a worker a fixed sum per each unit made or service or procedure performed.  It is a form of “incentive” compensation.  The worker is paid a fixed amount thereby encouraging efficiency and productivity, rather than by the hour no matter how long it takes.

The California Labor Commissioner, Division of Labor Standards Enforcement (DLSE) has said that piece rate plans may also be in addition to or in the alternative to a salary or hourly rate.  For example, the DLSE Enforcement Policies and Interpretations Manual (2002 Update) states, “compensation plans may include salary plus commission or piece rate; or a base or guaranteed salary or commission or piece rate whichever is greater” (emphasis added).

Thus, some California employers who pay on a piece rate basis pay either a piece rate or an hourly rate, namely the minimum wage, “whichever is greater.”  And it would seem based on the DLSE’s own interpretation (and logic) this practice would be legally permissible.  So long as the piece rate compensation exceeds actual hours worked times the minimum wage it seems California’s minimum wage obligation would be met.

But recent California state and federal cases call into question the viability of compensation plans that pay the “greater of” piece rate compensation or actual hours worked times the minimum wage.

The “Piece Rate” Compensation Plan In Downtown LA Motors.

In Gonzales v. Downtown LA Motors, LP (3/6/2013), a Mercedes Benz dealership (Dealership) had a piece rate plan.  It paid its automotive service technicians a “flat rate” ranging from $17/hour to $32/hour based on the technician’s experience for every “flag hour.”  Flag hours were earned while working on a repair order.

All other non-repair time, including time spent waiting around, obtaining parts, cleaning their work stations, attending meetings, traveling to other locations to pick up and return cars, reviewing service bulletins, and participating in on-line training, was not separately compensated.

All actual hours worked were recorded for each pay period.  At the end of each pay period, the Dealership calculated two numbers: 1) the actual hours worked times the minimum wage (minimum wage “floor”) and 2) the flat rate pay that resulted from the “flag hours.”  The Dealership compared the two numbers and if the “flag hours” pay was lower than the minimum wage “floor” the Dealership paid the difference thereby always paying at least the minimum wage “floor.”

Seems reasonable right?  Not so, said the court.

What Was Wrong (According To The Court)?

The court instead said the Dealership must pay the technicians for each and every minute worked, including the non-repair (“non-flag hours”) at the applicable minimum wage.  So the ruling in effect allowed the technicians to not only receive piece rate compensation (which always exceeded the minimum wage “floor”) but also additional pay for the non-flag hours at minimum wage.

Interestingly, the court relied heavily on the following language in Wage Order 4 (the same language is in Wage Orders 1 through 3 and Wage Order 5 through 16): “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” (emphasis added).

But this appears to support the practice used by the Dealership.  Indeed, it paid “not less than the applicable minimum wage for all hours worked in the payroll period, whether the remuneration is measured by . . . piece . . . or otherwise.”  Instead, the court used this language to require the Dealership to pay the piece rate plus (i.e. in addition to) the “applicable minimum wage” for “non-flag hours” even though the piece rate compensation was already “not less than the applicable minimum wage for all hours worked.”

The court characterized the Dealership’s practice as unlawful “averaging” of the technician’s pay.  In doing so, the court relied heavily on another California case called Armenta v. Osmose Inc., 135 Cal.App.4th 314 (2005) that stated employers may not  “average” hourly pay to avoid minimum wage obligations for employees paid by the hour, a proposition that is undeniable.

One slight problem: Armenta did not involve a piece rate plan at all.  And, unfortunately, at least one federal district court has reached a similar conclusion as Downtown LA Motors, LP based on Armenta.  See Cardenas v. McLane FoodServices, Inc., 796 F.Supp.2d 1246 (2011) (truck drivers entitled to minimum wage for waiting time and other non-piece rate duties; no “averaging” allowed).

Rather than “averaging,” however, the Dealership’s practice could simply be seen as paying the technicians in the alternative, i.e. paying the greater of piece rate compensation or minimum wage compensation, an interpretation the court ignored.  Since the Dealership in fact calculated all hours worked times the minimum wage and paid at least that, it seems the Dealership complied with its minimum wage obligations.

To allow the technicians to recover essentially a windfall by getting paid minimum wage compensation in addition to the agreed upon piece rate compensation seems to be a misinterpretation of California’s minimum wage law.  Perhaps a petition for review will be filed to the California Supreme Court.

Until then however, California employers must exercise extreme caution in formulating piece rate compensation plans.

What To Do In The Meantime.

One obvious “solution” is to not pay on a piece rate basis at all.  Simply pay on an hourly basis for all hours worked by nonexempt employees.  That’s simple and eliminates any doubt.

If your company wishes to maintain a piece rate compensation plan, one option is to wait until the California Supreme Court rules on the issue (update as of 7/2/2013: the Downtown LA Motors case has been appealed to the California Supreme Court).

A second option is to modify your piece rate plan so that it compensates piece rate employees for all actual hours worked at minimum wage and then pays a “bonus” rate or piece rate that compensates the piece rate worker for piece work in addition to the actual hours worked at minimum wage.  But then again this would defeat the purpose of a piece rate plan which is supposed to be a form of incentive compensation.