California Hammers Final Nail into Piece Rate Coffin at the Same Time it Creates an Affirmative Defense

Employment Law  

October 20, 2015

Signed by the Governor last week, AB 1513 codifies a series of recent judicial decisions holding that employers must separately compensate piece rate employees for non-productive time, rest periods, and recovery periods.  The new legislation requires employers using piece rate systems to compensate non-productive time at the “applicable minimum wage,” which it defines as the highest of the state, federal or local minimum wage applicable to the employment.  Employers must also separately compensate piece workers for rest and recovery periods and a calculation to determine the hourly rate that must be applied is provided.  New and additional information about non-productive hours, rest and recovery times, and payment rates must be included on employee wage statements.  Recognizing that many employers using piece rate systems do not currently compensate employees on an hourly basis for non-productive time, rest periods and recovery periods, the legislation also establishes a process whereby some employers can make back payments to piece rate employees in exchange for an affirmative defense to penalties and other damages.

Under piece rate systems, employees are paid a set rate for each “piece” they produce. Piece rate wages are used in certain industries including agriculture (where workers are paid by the acre or the number of boxes they harvest), trucking (where drivers are paid by the load or by the mile), and auto shops (where mechanics are paid by the service they complete).  The virtue of a piece rate system is that it rewards employees for efficiency and increases overall production because by producing more pieces, an employee may increase his or her compensation.

For nearly a decade courts have struggled with the different ways that state and federal courts analyze whether a compensation system complies with minimum wage requirements.  Federal law allows employers to average a worker’s compensation across all the hours worked.  So long as the average is above the minimum wage, there is no violation.  Yet in 2005, a California court in Armenta v. Osmose, Inc. (2005)135 Cal.App.4th 314, 324, held that an employer paying an hourly rate well above the minimum wage cannot use the federal averaging method and violates California’s minimum wage law if it does not pay employees for each fractional hour worked.  In 2013, two other California decisions extended this rule to piece rate systems.  The first case, Gonzalez v. Downtown LA Motors, LP (2013) 215 Cal.App.4th 36, 41, held that under California’s minimum wage law, employers who compensate employees on a piece rate basis must also pay those employees a separate hourly wage for all other time worked, including work performed before, after and between piece rate tasks (“non-productive time”).  Gonzalez involved auto technicians who were paid by the piece for repair work but who were not paid for the non-productive time between repairs.  Several months later, another appellate court in Bluford v. Safeway Stores, Inc. (2013) 216 Cal.App.4th 864, 872, expanded this rule to include rest periods, holding that a piece rate compensation formula that does not compensate separately for rest periods is not in compliance with California’s minimum wage law.

Because many employers historically did not compensate piece rate employees on an hourly basis for rest periods and non-productive time, they expressed concern that these decisions created significant exposure, encouraged litigation, and complicated the administration of their compensation systems.  In an effort to mitigate these concerns and provide piece workers with more timely back pay recoveries than might be available in litigation, the legislation creates an affirmative defense whereby employers may avoid damages and penalties for claims based solely on a failure to compensate separately for non-productive, rest and recovery time prior to December 31, 2015.  In order to take advantage of the defense, employers must comply with certain procedures, including making back payments to current and former employees for the time period from July 1, 2012 to December 3, 2015.  Employers must provide notice of their election to use the defense to the Director of Industrial Relations by July 1, 2016 and complete the back payments by December 15, 2016.

Employers using a piece rate should carefully analyze their compensation systems to determine whether they need to take advantage of this affirmative defense.  Because the defense does not apply to work performed after December of this year, piece rate employers must also bring their compensation systems into compliance with California law by January 1, 2016.  Based on the complications that may arise in calculating the regular rate, bonuses, overtime, rest period pay and recovery period pay in a compensation system that uses both hourly and piece rate calculations, employers should also carefully consider whether they intend to retain a piece rate system after 2015.