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December 30, 2015

California Department of Industrial Relations Launches New Webpage Aimed at Employer Compliance With New Piece Rate Law


Just days before the new piece-rate law is scheduled to take effect on January 1, 2016, the California Department of Industrial Relations (“DIR”) launched a new website to assist employers in complying with the new law.  On December 22, 2015, the DIR issued a press release announcing implementation of Assembly Bill 1513 (“AB 1513”), which adds Section 226.2 to the Labor Code, and requires that piece-rate employees receive a separate hourly wage for those periods of work time when they are not generating piece-rate earnings.
 
The DIR also issued a Fact Sheet, Frequently Asked Questions (“FAQ”), a form for employer piece-rate back pay elections, and a list of employers that have opted to participate in Labor Code 226.2’s piece-rate back pay “cure” program.
 
Background
Piece-rate compensation refers to paying an employee a specified sum for completing a particular task or making a particular item, and is generally contrasted with hourly compensation, which pays employees based on hours worked, according to the DIR.
 
Labor Code 226.2, in part, codifies a line of cases that concerned payment to piece-rate employees when waiting for work and payment to piece-rate employees during rest breaks. (See Gonzalez v. Downtown LA Motors, LP (2013) 215 Cal.App.4th 36 and Bluford v. Safeway Stores, Inc. (2013) 216 Cal.App.4th 864.)  Labor Code 226.2 establishes how employers must pay for rest periods, recovery periods, and other non-productive time for piece-rate employees.  Labor Code 226.2 also provides employers with a limited opportunity to “cure” certain violations associated with piece-rate compensation.  You can read more about the law and its requirements in our prior Alert.

Frequently Asked Questions      
The new information on the DIR website includes several FAQs discussing the DIR’s interpretation of Labor Code 226.2, including the following notable points:

Does the new law apply to employees who work on a commission basis? 

No.  By its terms, new Labor Code section 226.2 applies to “employees who are compensated on a piece-rate basis for any work performed during a pay period.”  It does not apply to employees who are compensated on a commission basis.  Note, however, that it is the nature of the compensation that is determinative, not the label. …

The DIR then provides further explanation of how it differentiates piece-rate compensation plans sometimes erroneously labeled as “commission” plans and commissions (which it essentially limits to earnings derived from sales).
 
What are the new compensation requirements for rest and recovery periods for piece-rate employees?

New Labor Code section 226.2, subdivision (a), paragraphs (1) and (3) provide that:

  • Employees must be compensated for rest and recovery periods separate from any piece-rate compensation.  and
  • The rate of compensation for rest and recovery periods shall be the higher of: 
    • An average hourly rate determined by dividing the total compensation for the workweek, exclusive of compensation for rest and recovery periods and any premium compensation for overtime, by the total hours worked during the workweek, exclusive of rest and recovery periods.  
    • The applicable minimum wage.

This means that piece-rate employees must be paid compensation for rest and recovery periods that is separate from their piece-rate compensation.  An employer may not treat the piece-rate compensation as including compensation for rest and recovery periods, no matter how the piece-rate was determined. …
  
If an employer pays a base hourly rate for all hours worked (for example, minimum wage), but also pays additional piece-rate compensation, is it sufficient for the employer to just pay minimum wage for the employee’s rest breaks? 

​​​No.  Going forward, the new statute requires compensation at an average hourly rate determined by dividing total compensation by the total hours worked in the workweek…. This encourages employees to take their authorized rest breaks, without feeling that doing so will decrease their compensation.

Does new Labor Code section 226.2 mean that employers will need to track the number of minutes that employees actually take for their rest and recovery periods?
 

No.  New section 226.2, subdivision (a)(2) requires that an employee’s itemized wage statement state “[t]he total hours of compensable rest and recovery periods, the rate of compensation, and the gross wages paid for those periods during the pay period.” …
  
What is “other nonproductive time?” 

New Labor Code section 226.2 defines “other nonproductive time” as “time under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis.”

What constitutes “other nonproductive time” under this definition will obviously vary depending upon the nature of the work and the “activity being compensated on a piece-rate basis.”
 
What are the new compensation requirements for other nonproductive time?
 

New Labor Code section 226.2, subdivision (a)(1) and (a)(4) provide that:

  • Employees must be compensated for other nonproductive time separate from any piece-rate compensation, and
  • Employees must be compensated for other nonproductive time “at an hourly rate that is no less than the applicable minimum wage.”

This means that piece-rate employees must be paid compensation for “other nonproductive time” that is separate from their piece-rate compensation.  An employer may not treat the piece-rate compensation as including compensation for other nonproductive time, no matter how the piece-rate was determined.
 
The compensation requirement for other nonproductive time is simply that it be paid at an hourly rate of no less than the applicable minimum wage.
 
The statute also contains a kind of “safe harbor” provision in subdivision (a)(7), which states:
 
An employer who, in addition to paying any piece-rate compensation, pays an hourly rate of at least the applicable minimum wage for all hours worked, shall be deemed in compliance with paragraph (4).
 
This means that if an employer pays a base hourly rate of at least the applicable minimum wage for all hours an employee works, in addition to any piece-rate compensation, the employer will be deemed in compliance with the compensation requirements for other nonproductive time.
 
Safe Harbor to Correct Improper Compensation to Piece-Rate Employees  
The law provides “safe harbor” to any employer who failed to previously compensate or under-compensated employees for rest and recovery periods or other non-productive time if they timely and properly correct the error. According to the DIR, this means that, for time periods prior to January 1, 2016, an employer may be relieved of liability for damages, statutory and other penalties, arising out of claims asserting a failure to pay compensation for rest and recovery periods and other nonproductive time, if the employer meets all of the requirements set forth in the statute.    

In the FAQ, the DIR summarizes the necessary steps for an employer to cure violations:

What does an employer need to do in order to have the affirmative defense created by the statute? 

  • The employer must make payments to each of its employees, except as specified, … for previously uncompensated or undercompensated rest and recovery periods and other nonproductive time from July 1, 2012, to December 31, 2015, inclusive, using one of the formulas specified in subparagraph (A) or (B): 

    (A) The employer determines and pays the actual sums due together with accrued interest calculated ...
    (B) The employer pays each employee an amount equal to 4 percent of that employee’s gross earnings in pay periods in which any work was performed on a piece-rate basis from July 1, 2012, to December 31, 2015, inclusive, less amounts already paid to that employee, separate from piece-rate compensation, for rest and recovery periods and other nonproductive time during the same time [not to exceed 1%].
     
  • The employer must give notice to the Department of Industrial Relations by no later than July 1, 2016 of its election to make payments to its current and former employees pursuant to the new statute. 
  • The payments must be completed by December 15, 2016. 
  • The payments to employees must come with a statement summarizing how the payment was calculated.  
  • The employer must use due diligence to locate and pay former employees.  
  • Payments for former employees who cannot be located must be made to the Labor Commissioner’s Unpaid Wage Fund (with an additional administrative fee).    

Despite the DIR’s attempt to explain the law, compliance going forward and taking advantage of the safe harbor remains incredibly complicated.  Employers who continue to pay piece-rate are going to be open to claims of failure to comply with the new law.  For more information concerning the new piece-rate law, please consult one of the authors.

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