by Michelle Ferber and Ben McDonald
Piece-rate compensation, or employee compensation systems in which the employee is paid only for each unit of production, has come under scrutiny in state and federal courts in recent years and was dealt a substantial blow when Governor Brown signed AB 1513 on October 10, 2015. Codifying the results of state and federal litigation, new Labor Code Section 226.2 sets forth the new rules regarding the compensation of piece-rate employees for time spent on the job, but not actively working on a project for which the employee earns her piece-rate wage.
To illustrate the situation 226.2 is meant to address, consider a mechanic who is paid on a piece-rate basis. This mechanic is required to work six piece-rate hours per day at $20 dollars per hour and therefore makes $120 dollars per day. On a particular day, the mechanic arrives to work and has three cars lined up for repairs, each of which will take two hours to complete. The mechanic is able to complete his six hours of work in a period of six hours because he is being productive 100% of the time. However, on a different day, cars are not already lined up for repairs. While the mechanic ends up performing six hours of work and collecting $120, she had to spend eight hours at work that day because she had periods of nonproductive time. While in both situations the mechanic earns $120 per day, on the first day she is compensated at $20 per hour, and on day two she is compensated at $15 per hour.
Essentially, on day two, the mechanic is not paid for two hours she spent at work. The new Labor code section comes into play in regard to calculating whether an employee is making the mandated minimum wage. If we consider the example above, on either day, the mechanic is making more than minimum wage ($20 per hour/$15 per hour) when her wage is calculated according to her average pay for the total hours worked in the day. However, under the new law, minimum wage compliance is calculated by the hour. Therefore, on the second day in the example above, the mechanic is certainly not making minimum wage for the two hours she is not working on a piece-rate matter because she is not being paid for those hours at all.
Effective January 1, 2016, employers will have to adhere to three basic requirements for paying employees on a piece-rate basis. First, employees must be paid separately for break and rest time. This means that employers must pay employees for the time they spend on rest or recovery breaks at minimum wage rate, or the average hourly wage for all time worked during the work week, whichever is greater. Second, employees must be paid separately for another category, “nonproductive time.” This is time when the employees are under the employer’s control but not actively engaging in the earning of the piece-meal wage. The two hours discussed in the example above falls into this category of time for which employees must be compensated. The employee must be compensated for this time at minimum wage or higher. The employer can calculate the employee’s hours in this category of time by actual records or a “reasonable estimate.” Unfortunately, there is not much guidance on discerning time spent on the piece-rate activity or what constitutes a reasonable estimate by an employer. Finally, wage statements must include, in addition to preexisting requirements: 1) the total hours of compensable rest and recovery periods and the rate and wages paid for this time during the pay period, and 2) the total hours of nonproductive time and the rate and wages paid for this time during the pay period.
While this new law has the potential to put employers against the wall and expose them to minimum wage and wage statement liabilities, there is a limited safe harbor whereby employers may assert an affirmative defense to all liabilities for failure to pay employees for rest and recovery periods and other nonproductive time. However, for an employer to avail herself of this safe harbor, by December 16, 2015 the employer must: 1) pay current employees for rest/recovery time and nonproductive time during the period of July 1, 2012 through December 1, 2015, with interest. This can be calculated either by providing the actual amount of wages due for the rest/recovery and break time and nonproductive time, or four percent (4%) of the employee’s gross earnings during that period; 2) the employer must make a good faith effort to locate and provide these payments to qualifying former employees; and 3) the employer must provide written notice to the California Department of Industrial Relations by July 1, 2016 that the employer intends to make the above noted payments. If these requirements are satisfied and the employer is sued for violations under the law, the employer can assert this affirmative defense for any claim or lawsuit filed on or after March 1, 2014 and enjoy protection for violations through December 31, 2015.
For employers compensating employees by piece-rate systems, the new Labor Code section 226.2 is both a significant and uncertain threat. Employers should scrutinize their piece-rate compensation practices and evaluate the propriety of such a compensation plan to determine whether the value of that system outweighs the risks and detailed requirements discussed above. If a piece-rate compensation plan is a business necessity, employers are encouraged to immediately analyze their practices for compliance so that remedial measures may be taken as soon as possible.
DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.