New Affirmative Defense for Piece Rate Employers

In California, piece rate compensation plans have been on the chopping block since 2013. That’s when two California courts ruled that piece-rate employers had to separately pay employees for rest and recovery periods and “nonproductive” time. Back then we wrote those decisions put the “nail in the coffin” for piece rate compensation in California.

Those 2013 decisions also opened the flood gates for class action and California Private Attorneys General Act (PAGA) claims for failure to compensate for rest periods and “non-productive” time and for failure to show such compensable hours and pay on the itemized wage statement (a.k.a. paystubs).

On October 10, 2015, California passed a new law (AB 1513) that affirms those court decisions. It also includes some great news for piece rate employers caught in the quagmire: AB 1513 provides a complete defense to piece rate employers who did not separately compensate for rest and recovery periods and non-productive time and who failed to show such time on their employees’ itemized wage statements.

Background On Piece-Rate Pay

As its name implies, piece-rate pay is compensation for a completed job or “piece,” as opposed to hourly pay. For example, an air conditioner installation company that pays employees based on the number of installations regardless of hours worked uses a piece-rate system. An automotive company that pays a fixed rate for an oil change or a brake job pays on a piece rate basis. Paying truck drivers by the mile versus hourly is a piece rate system.

An automotive technician might work an 8 hour day and perform 6 oil changes and get paid a fixed piece rate of $40 per oil change. When not performing oil changes the employee might sit around for 3 hours waiting to perform oil changes and occasionally sweep the service bay and/or move cars around the lot. On a piece rate basis the employee would be paid 6 x $40 or $240. On an hourly basis at minimum wage the same employee would be paid 8 x $10 (as of 1/1/2016) or $80.

Seems fair doesn’t it? Not so, say California courts and now the California legislature.

The Law Before AB 1513

In recent years, California courts have made piece-rate plans such as the above illegal:

In 2005, a California court decided that California’s minimum wage laws require an employee be paid at least minimum wage for each and every hour worked. The employer there paid hourly employees only for their productive time (installing utility poles), and not for “nonproductive” time (other time “under the employer’s control but not actually installing poles). The court made clear that California employers could not average an employee’s hourly wage (i.e. total wages divided by the total of productive and nonproductive time) in order to satisfy the state’s minimum wage law. Instead, an employee must be paid at least the minimum wage for every hour spent under the employer’s control. Although this case did not involve a piece-rate employer, the decision nonetheless had subsequent wide-ranging effects on piece-rate pay.
In 2013, the same California court decided that the “each and every hour worked” requirement for minimum wage pay applied to piece-rate employers (see our post here). This case involved an automotive service company that paid technicians a predetermined amount (i.e. piece-rate) for specified repair jobs. The technicians were not paid for the time they spent waiting for customers, cleaning up or moving cars around the lot. The court extended its own 2005 decision in requiring piece-rate employers to pay separately and additionally for downtime, including time spent waiting for customers and other nonproductive time.
Also in 2013, another California court decided that piece-rate employers must pay employees separately for rest periods (see our post here). In that case the employer paid truck drivers by the mile rather than by the hour. The court said paying by the mile failed to compensate the drivers for their 10 minute paid rest periods. The failure to separately account for and pay for paid rest periods violated California law according to the court.

AB 1513 Follows The Case Law

AB 1513:

Requires piece-rate employers to pay employees for rest and recovery periods, separately and in addition to piece-rate pay. The pay rate for an employee’s rest and recovery periods must be the higher of either the applicable minimum wage (meaning state, local or federal, whichever is highest), or the employee’s average hourly rate for the workweek. This pay is separate from any piece-rate pay.Example: Piece rate employee’s wages for the workweek are $800. Hours worked (excluding rest/recovery periods) for the same workweek is 40. The average hourly rate is $20 per hour. Under AB 1513, you must pay this employee for rest time and recovery periods, in addition to the piece-rate amount. Because this employee’s average hourly pay of $20 exceeds the current minimum wage, you must use the $20 hourly rate when calculating his or her rest or recovery period pay.
Requires piece-rate employers to pay employees for other nonproductive time at a rate equal to or above the applicable minimum wage. The pay rate for an employee’s nonproductive time must be at least the minimum wage. This pay is separate from any piece-rate pay.Example: Your Company pays an employee $60 for a job that takes 2 hours ($30 per hour). The employee performs one job, waits one hour until another customer arrives, then performs a second job. You must pay them $120 ($60 per job) and at least the applicable minimum wage for the hour of downtime.
Requires piece-rate employers to follow strict timekeeping and reporting requirements. Under AB 1513, piece-rate employers must provide paystubs showing the total hours of rest and recovery periods, the pay rate, and the total pay amount for those hours. Paystubs must also show the total hours of other nonproductive time, the pay rate, and the total pay amount for that time.

AB 1513’s “Safe Harbor” Affirmative Defense

The good news is AB 1513 provides a complete affirmative defense for California piece-rate employers who failed to compensate for unpaid rest, recovery, and/or other nonproductive time through December 31, 2015. The defense allows piece rate employers to avoid the substantial enhanced statutory and civil penalties and liquidated damages that are associated with such claims.

It also provides in effect a “safe harbor” for those employers who wish to correct problems related to piece rate compensation before they get sued.

The safe harbor/affirmative defense applies to unpaid rest, recovery, and other nonproductive time occurring between July 1, 2012 and December 31, 2015. To take advantage of the safe harbor/defense:

The employer must compensate its piece rate employees for all uncompensated rest, recovery, and other nonproductive time during the above period. The employer can do this one of two ways: 1) pay the actual compensation owed; or 2) pay an estimate based on 4% of the employee’s gross earnings for each pay period between July 1, 2012 and December 31, 2015.
The employer must pay the rest, recovery, or other nonproductive time wages by December 15, 2016.
The employer must provide an accurate statement to each employee stating payment is being made under the Labor Code section allowing this payment, among other specific information.
The employer must notify the Director of Industrial Relations in writing of its election to make the above payments no later than July 1, 2016. This written notice must include the legal name and address of the employer. Note: AB 1513 directs the Department of Industrial Relations to post the employer’s written notice on the Department’s website.

This applies only to certain employers depending on timing of the filing of the lawsuit, if any, and also whether there have been prior settlements and/or releases signed by employees.

Lessons Learned

Do Not Use Piece Rate Compensation. California law makes piece-rate pay impractical and an inevitable legal landmine. The administrative burden/cost of compliance alone is enough to axe your piece rate system. And if you don’t get it exactly right, you have serious liability. If you have even a handful of employees you are exposed to a “representative action” under PAGA and if you have more than a handful, a class action lawsuit. Both can be life threatening to your business.
If You Insist On Using Piece Rates. You should closely examine your piece rate compensation plan and your time keeping, accounting and other administrative systems to ensure you are complying with AB 1513 and the court decisions. You should seek advice from a knowledgeable and experienced wage and hour lawyer in doing so.
You Are A Piece Rate Employer And Have Been Sued Under PAGA or Via Class Action. You should closely examine AB 1513 and determine with advice of knowledgeable and experienced wage and hour counsel whether you can take advantage of the complete defense under AB 1513. You should start now. You only have until July 1, 2016 to give written notice of your election to pay the back wages owed and until December 15, 2016 to pay your employees to utilize the defense.
You Are A Piece Rate Employer And Have Not Yet Been Sued But Know There Are Problems. You should seek advice from a knowledgeable and experienced wage and hour lawyer to determine whether it makes sense to utilize the AB 1513 “safe harbor” or wait out the statute of limitations. The statute of limitations bars claims after a certain time and is a separate complete defense. AB 1513, however, tolls (i.e. extends) the statute of limitations for a certain amount of time. So that should be considered as well. Remember you must give notice of your election to pay the back wages due no later than July 1, 2016 so you should act now.

“Piece Rate” Employers: Use Your New Affirmative Defense!