Variable Hourly Rate Incentive Compensation – Finally A Silver Lining For California Employers

Since 2012, California businesses have been hammered by adverse compensation rulings. Incentive compensation plans have been under fire. It seems the California legislature (and courts) think everyone should be paid solely on an hourly basis.

Finally California employers have an court opinion that supports incentive-based compensation. But first the background.

California Minimum Wage Obligations/Challenges To Same.

California law says, “Every employer shall pay to each employee . . . not less than the applicable minimum wage for all hours worked in the payroll period, whether the remuneration is measured by the time, piece, commission, or otherwise.” (Cal. Code Regs., tit.8, § 11040, subd. 4(B).). Nonetheless, California courts have been issuing rulings adverse to the plain meaning of the law.

So what does it mean to “pay to each employee . . . not less than the applicable minimum wage for all hours worked?”

Unfortunately for employers, California courts have been interpreting that to mean a California business shall pay a non-exempt employee all hours worked “separately” at minimum wage, on an hourly basis. Of course this is not the same words as “not less than the applicable minimum wage for all hours worked in the payroll period.”

And further this is not the only reasonable or obvious interpretation of these words.

Further, California courts have ignored the plain language of the phrase, “whether the remuneration is measured by the time, piece, commission, or otherwise,” in saying each hour worked must be separately paid hourly at minimum wage.

But why then have the any other lawful measurement, including by the “piece, commission, or otherwise?” How might one measure minimum wage compensation by the “piece, commission, or otherwise” other than by time (i.e., by hours, minutes, and seconds)? Seems impossible unless one converts “piece, commission, or otherwise” to time (i.e. hours, minutes, and seconds).

This author respectfully submits that, the words “not less than the applicable minimum wage” does not limit payment of wages to an hourly basis only. This author further submits California law plainly allows an employer to pay “not less than minimum wage” even if it pays by the “piece, commission, or otherwise.” Further, “not less than the minimum wage” paid by the “piece [or] commission” necessarily means if the hours worked to earn the piece rate or commission compensation is “not less than minimum wage,” then there is no violation of law. What else can the words in law mean?

Take the following example: automotive technician is paid either: 1) hourly at $11/hour (California minimum wage) for all “actual hours worked;” or 2) $40 flat for each tire change. Further let’s assume, the “actual hours worked” is 35 hours in a one week pay period, broken down as follows, 25 hours performing tire changes, and 10 hours doing nothing (or taking rest breaks). Say the auto tech performed 20 tire changes in that week.

Mathematically, the employee who was paid minimum wage at $11/hr made $385 (35 actual hours worked x $11/hr). The employee paid $40 per tire change made $800 (20 tire changes x $40).

To the employees who read this post, would you prefer wages of $385, or $800? We don’t need to answer that question as the answer is obvious.

A more important question: is either the $385 or the $800 “not less than the applicable minimum wage? Obviously, the answer is of course “no,” neither the $385 or the $800 is “less than the minimum wage.” Both are equal to or greater than the minimum wage.

Further, do you think it fair if one of your colleagues was paid $385 for not doing any work at all, when you performed 20 tire changes? To be more precise, you worked 35 hours and performed 20 tire changes; your colleague worked the same 35 hours but performed zero tire changes. But you were both paid $385 (35 hours x $11 minimum wage per hour). Fair? We know your answer.

But California courts disagree. California courts have ruled no matter if you would have made $800, you should have made more because you should have been paid for not doing any work at all, at minimum wage. So the employee who was paid $385 for 35 hours of doing nothing is ok; but the employee who was paid $800 for 25 productive hours should have been paid another $110 (10 hours x $11/hr) for the 10 hours of doing nothing.

Does this make sense?  Does this sound like the “American way?” The author doesn’t think so.

California courts all say not only is it fair, nor does it matter whether it makes sense, it’s required by California law. They say unless you are paid minimum wage for every second worked (see Troester v. Starbucks Corp.), it doesn’t matter that you made effectively $22.86/hr ($800/35 hours of work), you weren’t paid at least minimum wage for the 10 hours where you did no work.

The problem with us lawyers (judges are lawyers too): we’re not mathematicians. Sadly, most of us are not business owners either.

Based on California court rulings, piece rate plans are unlawful (which essentially the above example is) – see Gonzales v. Downtown LA Motors and AB 1513 (now Labor Code section 226.2), unless employers pay for all non-productive time separate at minimum wage and all rest period time at essentially a weighted average.

Draws against Commission Plans (your basic sales commission plan) are unlawful if they do not separately compensate for “rest periods” – see Vaquero v. Stoneledge Furniturer LLC and more particularly as applied to employees licensed under the California Barbering and Cosmetology Act (SB 490) unless an employer pays a guaranteed base hourly rate of 2x the California minimum wage for all hours worked (note the 2x min wage requirement only applies to those workers licensed under the California Barbering and Cosmetology Act).

The Silver Lining And Some Common Sense

In Certified Tire and Service Centers (CT) Wage and Hour Cases, California employers wanting an incentive compensation plan finally get a reprieve.

The facts in the Certified Tire case: employer Certified Tire sold tires and performed automotive repairs (just like the employer in Downtown LA Motors). Unlike DTLA which paid its workers based on “flag hours,” (a piece rate compensation plan) CT paid its automotive technicians a variable hourly rate. CT derived that hourly rate each pay period based on a formula tied to labor productivity. Each pay period CT ran this hourly rate calculation, and then compared that hourly rate against the minimum wage then in effect. CT paid the higher of the hourly rate based on its formula or California minimum wage.

For example, say an auto tech worked 35 hours, broken down as follows: 25 hours productive time, and 10 hours non-productive time and rest period time. Say based on the formula the auto tech’s hourly rate amounted to $17.81/hr in a pay period. CT compared the $17.81 against California minimum wage, say $11/hr. Since $17.81/hr is more than $11/hr CT paid the auto tech $17.81 x all hours worked in the pay period. CT paid for 35 hours at $17.81/hr, total paid was $623.35.

What happened if the hourly rate based on CT’s formula was less than $11/hr? CT paid the auto tech at minimum wage, $11/hr. Based on 35 hours worked that would be $385/hr.

The Plaintiffs’ Less Than Stellar Arguments

Before we get into the plaintiffs class counsel’s arguments, first a question: under either circumstance in the immediately preceding example has CT paid “not less than the applicable minimum wage” for the 35 hours worked?”

The answer is obvious. No, it has not paid “less than the applicable minimum wage” for the 35 hours worked.” Clearly whether CT paid $17.81/hr or $11/hr, neither was less than minimum wage of $11/hr.

Yet, that is exactly what the plaintiffs’ class action counsel argued. Class counsel argued CT had not paid at least minimum wage for all hours worked, including for the “non-productive” time or for “rest period” time.

The trial court soundly rejected the plaintiffs’ argument.

If this all seems lame to you, we agree. We also sympathize with all California employers, and especially Certified Tire, who must deal with lawsuits and unfortunately sympathetic courts who seem to lack business (and mathematical) sense.

If we had to guess, Certified Tire incurred six figure (if not seven figure) legal fees and costs to prove it was right.

All California businesses out there, large and small, should write Certified Tire and their attorneys a note of “thank you” for fighting the good fight, for having the courage, wherewithal, and financial means to prove its compensation plan lawful, and to create an appellate decision favorable to all the great employers out there trying to make a profit while complying with California wage and hour law.

So How Is It Plaintiffs Can Sue Over Bogus Claims?

Because our California legal system allows it. Further, it incentivizes it. On wage and hour claims such as those at issue here, plaintiffs (employees) are automatically entitled to recover their attorneys’ fees and costs if they prove any wages at all are owed (even $1). Employers, on the other hand, are not entitled to any of their attorneys’ fees even if they win (as did Certified Tire).

Is it a one-way street? You bet. Is this unfair? You bet. We are sorry to inform California employers of this. We do not make the laws. We don’t agree with them either; but we’re all stuck with them so it’s best we learn how to comply.

We recommend you do your best to comply with the law so as not to be sued.

Conclusion:

1. While we like the Certified Tire decision and the variable rate compensation plan it found lawful; we highly recommend all California employers that are considering implementing the Certified Tire compensation plan to consult experienced and knowledgeable wage and hour counsel.
2. We believe it is a viable compensation plan that avoids the “piece rate” and “% of revenue” compensation plan pitfalls.
3. At the same time; it would be beneficial to have other California appellate courts approve of the Certified Tire compensation plan and/or a California Supreme Court affirming the Certified Tire appellate court opinion.
4. This is one of many employment and labor law issues that impact California employers. We recommend you contact an experienced and knowledgeable California employment and labor law attorney to answer you HR employee questions.