May 16, 2016
In recent years industries that have traditionally utilized piece-rate systems to compensate employees for their work have been hard hit by a surge in class and representative actions challenging the piece-rate system. In particular, these lawsuits often challenge an employer’s practices related to payment for rest breaks and other non-productive time, such as mandatory safety meetings or time spent waiting for work. In October 2015, Governor Brown signed Assembly Bill 1513 which went into effect on January 1, 2016 as Labor Code section 226.2. Section 226.2 requires employers to separately compensate piece-rate employees for rest and recovery periods and other non-productive time. The statute provides employers with a limited opportunity to seek safe harbor and avoid (or minimize) liability for certain wage and hour claims often asserted by piece-rate employees. In order to take advantage of the safe harbor provision, employers must notify the Department of Industrial Relations ("DIR") of their safe harbor election by July 1, 2016 – a date that is quickly approaching.
A series of California and federal court decisions in the last few years, including Bluford v. Safeway Stores, Inc. and Gonzalez v. Downtown L.A. Motors, held that employers are required to separately compensate piece-rate employees for rest breaks and non-productive time. While it is unclear whether Labor Code section 226.2 is merely a codification of existing law as set forth in Bluford and Gonzalez, the statute does not explicitly contain a statement that it is a declaration of existing law, and this issue is the subject of ongoing litigation in the California appellate courts. Employers that did not separately compensate piece-rate employees for rest breaks, recovery periods or other non-productive time prior to December 31, 2015 need to promptly conduct an analysis to determine whether to seek safe harbor.
Electing Safe Harbor
What are the benefits of electing safe harbor?
Section 226.2 permits employers who comply with the statutory safe harbor requirements to assert an affirmative defense that bars liability for underpaid or unpaid rest breaks and non-productive time and the derivative claims typically asserted on such claims, including waiting time penalties, unpaid wages, liquidated damages, and inaccurate wage statements for the period prior to December 31, 2015. The safe harbor election requirements are both specific and complicated but may give employers a brief opportunity to buy limited peace and avoid liability.
How do you elect safe harbor?
Employers must notify the DIR of their election prior to July 1, 2016 through a letter or by completing the election form on the DIR’s website. If an employer uses the form on the DIR’s website they must provide information regarding the total number of current and former employees and the estimated value of payments to be made. After the election is made, the employer’s name will be posted on the DIR’s website until March 31, 2017.
Making Safe Harbor Payments to Current and Former Employees
While notice must be given to the DIR by July 1, 2016, employers electing to make safe harbor payments to employees must complete the payments no later than December 15, 2016. The statute provides employers with two different payment options.
The first payment option requires employers to pay piece-rate employees the "actual" wages due for previously uncompensated or undercompensated rest breaks and non-productive time from July 1, 2012 through December 31, 2015, along with accrued interest. Employers will need to have some basis or records to show that they have properly calculated the actual amounts due to employees. If an employer makes a "good faith" error in calculating the payment due to an employee, the employee must notify the employer within 30 days and give the employer an opportunity to address the issue but the employer bears the burden of establishing that that the mistake was indeed a "good faith error."
The second payment option permits employers to pay a flat amount equal to 4% of the employee’s gross earnings from July 1, 2012 through December 31, 2015, for pay periods in which they received piece-rate earnings. Based on our experience, the flat 4% is less complicated and more economical choice for many employers, especially for those who did not track rest breaks or non-productive time. Employers may deduct any payments made for rest breaks, recovery periods and non-productive time during the same pay period from the 4% sum but the credit cannot exceed 1% of the employee’s gross earnings. Employers who elect the 4% payment are not required to include accrued interest.
In addition to the notice to the DIR, employers must provide employees with an individualized notice containing a statement that the payment is being made pursuant to section 226.2, which of the two statutory methods was used to calculate the payment, and the calculations that were made to determine the payments. In addition if the payment made is based on the "actual" wages due, the notice must include a "statement, spreadsheet, listing or similar document" that states each pay period covered by the payment, the total hours of rest and recovery periods and other non-productive time of the employee, the rates of compensation for that time, and the gross wages paid. If the payment made is based on the 4% calculation, the notice must include a "statement, spreadsheet, listing or similar document" that shows, for each pay period during which the employee had earnings from July 1, 2012 through December 31, 2015, the gross wages of the employee and any amounts already paid to the employee, separate from piece-rate compensation, for rest and recovery periods and other non-productive time.
In making the payments to former employees, employers are obligated to use due diligence in locating their former employees. Payments due to former employees who cannot be located must be paid to the Labor Commissioner’s Unpaid Wage Fund (plus an additional administrative fee).
Safe Harbor Limitations
The safe harbor does not apply to claims covered by Section 226.2 (rest breaks, recovery periods and non-productive time) if the claims were alleged in a lawsuit prior to March 1, 2014, or a lawsuit filed prior to March 1, 2014 in which the employee sought to add a claim related to rest and recovery periods or other nonproductive time prior to July 1, 2015.
The safe harbor provision also arguably may not apply to certain claims, such as claims that rest breaks were never permitted or were discouraged by the employer. The safe harbor also does not apply to any claims that accrue after January 1, 2016 — meaning if an employer continues to use a piece-rate compensation system for its California employees after January 1, 2016, the employer cannot avoid or minimize its liability for underpayment or non-payment of rest breaks, recovery periods or non-productive time through the safe harbor provisions of Labor Code section 226.2.
Next Steps for Employers…Before July 1, 2016
Employers seeking to take advantage of the safe harbor need to conduct a risk analysis and calculate the amounts due if they elect safe harbor — and they must do so immediately in order to meet the July 1, 2016 deadline. Employers who want assistance to ensure compliance with the safe harbor provisions or assistance conducting the calculations required are encouraged to contact the authors or their usual counsel at AALRR.