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September 5, 2013

California Courts Continue Attack on Piece-Rate Compensation Programs

The California Court of Appeal recently issued a decision in the case of Gonzalez v. Downtown LA Motors which calls into question practices under piece-rate and other incentive-based compensation programs.  The California Supreme Court declined to review the Gonzalez ruling, meaning employers using piece-rate compensation programs must comply with the holding of the case. Gonzalez must be given special attention by employers and is discussed in more detail below.

In Gonzalez, service technician employees (the “Plaintiffs”) alleged the car dealership’s piece-rate compensation program resulted in unpaid work hours in violation of California law. Plaintiffs were paid on a piece-rate basis by “flag hours,” under which they were compensated a set amount per repair task completed. “Flag hours” were assigned to each repair task, which meant a technician would accrue the number of hours set for that task, regardless of how long it actually took the technician to complete the task. “Flag hours” were accrued for each repair order.

At the end of each pay period, the dealership would calculate how much the technician would earn if paid at an hourly minimum wage rate. If that amount were higher than their total piece-rate compensation for the pay period, the dealership would supplement the pay with the difference. Thus, the dealership guaranteed the minimum wage for every hour worked.  The Plaintiffs, however, alleged this payment system did not properly compensate them for time they were required to be at work, but performing non-repair tasks such as cleaning their work stations and waiting for cars to repair.

Court’s Analysis
The court found Armenta v. Osmose, 135 Cal. App. 4th 314 (2005), to be applicable to piece-rate compensation. Armenta concerned an hourly compensation structure where the employees were only paid for time at a job site, excluding mandatory travel time in company vehicles. The employer in Armenta divided the total number of hours worked (including the travel time) by total compensation to ensure the employee averaged an hourly wage that met or exceeded the minimum wage requirements. The Armenta court rejected such averaging and held that an employer must track and pay employees at least minimum wage for each and every hour on the clock.

By applying the Armenta rationale to Gonzalez, the court found the dealership’s actions to be a method of unlawful pay averaging. The court held that when an employer uses a piece-rate compensation structure, employees must also be compensated at an hourly rate for all time during which they are not completing the piece-rate tasks.

The dealership argued that Armenta was inapplicable because of the differences in piece-rate compensation and hourly wages. The dealership argued that in Armenta, hourly employees were not paid for all hours worked, whereas in Gonzalez the dealership tracked all hours worked. Citing the Industrial Welfare Commission Wage Order language, the court noted that an employee had to be paid for all hours worked, whether it was “measured by time, piece, commission, or otherwise.” The court also cited to a federal court decision which applied Armenta under California law, and that held truck drivers compensated on a piece-rate basis must be compensated directly for all time worked. See Cardenas v. McLane Food Services, Inc., 796 F.Supp.2d 1246 (C.D.Cal.2011).

Potential Impact
The court’s holding in Gonzalez calls into question the legality of payment programs based solely on piece-rate work. Given the rationale applied by the court, the holding may be applied to commission payment plans as well, although the court did not address or consider employees compensated under commission payment plans or other incentive-based compensation methods.

Piece-rate payment plans do not easily compute into hourly payments, meaning that after Gonzalez, hybrid compensation structures with an hourly component and incentive-based component are likely to form out of necessity. Gonzalez may force employees across various industries that use piece-rate compensation to pay an hourly rate for non-piece producing time. As a result, not only will an employer’s piece-rate or incentive-based compensation structure become more complicated, but it will also lessen the effectiveness of the incentives.

Employers should take proactive measures in light of Gonzalez. An important step is to ensure the employee is being paid for all hours of work and that the check stub accurately and explicitly reflects such payments, including rest breaks and other downtime. An employer must be able to establish and prove that workers are being paid for all time worked, including downtime, under a piece-rate or other incentivized compensation system. Since piece-rate plans compensate an employee per task, expanding the definition of a task to include other routine and incidental activities can help ensure employees are paid for those incidental activities. However, an hourly payment would still be needed for other less common activities and the hourly rate should equal or exceed the minimum wage. Finally, employers who use a piece-rate or commission-based compensation program should no longer average an employee’s piece-rate payment over the pay period in an attempt to satisfy the minimum wage requirement.

Attorneys from Atkinson, Andelson, Loya, Ruud & Romo’s Private Labor and Employment Group will be discussing Gonzalez and other significant wage and hour developments at upcoming breakfast briefings, and are available to discuss the implications of these cases.

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