Piece-rate blues

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In the last six months, California courts have drastically limited an employer’s ability to utilize a piece-rate system to pay its employees.  Important court rulings have made it clear that each “hour worked,” as defined by the Labor Code, must be compensated and itemized if employers intend to exert any type of control, issue any directive, or place any requirement on their employees during non-piece-rate times.

In Gonzalez v. Downtown LA Motors, LP, (2013) 215 Cal. App. 4th 36, the plaintiff technician alleged that the defendant auto dealer’s method of computing wages owed to certain service technicians, who were paid on a piece-rate basis, violated California law.  The defendant’s policy was to pay a flat rate for each “flag hour” that a service technician accrued during the performance of a repair order.  Flag hours, determined by the defendant, were assigned to each repair task and intended to reflect the amount of hours technicians spend performing such repair tasks.  However, flag hours were paid regardless of the actual time a technician spent performing a repair order.  Though the defendant required technicians to clock in and out of each shift, flag hours accrued only when a technician performed a work order.  Importantly, technicians were expected to perform various tasks between repair order assignments.  Such tasks included obtaining parts, cleaning work stations, attending meetings, and traveling to other locations to pick up and return cars.  In an effort to comply with State-mandated wage and hour laws, the defendant systematically compared what a technician would have been paid for all “on the clock” hours at minimum wage rates against what the technician was actually paid for flag hours.  If the minimum wage number was larger than the flag hour number, the defendant added the difference between the two to a technician’s paycheck.

The appellate court upheld the lower court’s order and ruled in favor of the plaintiff on a class-wide basis.  The court affirmed Wage Order No. 4’s mandate requiring an employer to pay to each employee no less than the applicable minimum wage for all hours worked in the payroll period.  “Hours worked” is defined as “the time during which an employee is subject to the control of an employer, and includes all the time the employee is suffered or permitted to work, whether or not required to do so.”  The court affirmed its holding in Armenta v. Osmose, Inc., (2005) 135 Cal. App. 4th 314, in which it held that averaging piece-rate hours and comparing them against total “hours worked” to determine minimum wage compliance violated California law because such a practice necessarily failed to compensate every “hour worked.”  The defendant argued that DLSE policies require an employer to compensate an employee for non-productive time only if the employer affirmatively directs the employee to perform non-piece-rate work.  The court was not persuaded.  The relevant DLSE enforcement policy, as stated in its opinion letter issued on January 29, 2002, states:

[I]f, as a result of the directions of the employer, the compensation received by piece rate or commissioned workers is reduced because they are precluded, by such directions of the employer, from earning either commissions or piece rate compensation during a period of time, the employee must be paid at least the minimum wage (or contract hourly rate if one exists) for the period of time the employee’s opportunity to earn commissions or piece rate.

The court reasoned that both the assignment of work orders and requirements to perform other tasks was “at the direction of the employer” and therefore the employer controlled when and how a technician accrued flag hours.  Central to the court’s position was the fact that the defendant required its technicians to remain at work even when there were no vehicles to repair.

A few months later, in Bluford v. Safeway Stores, Inc., (2013) 216 Cal. App. 4th 864, the plaintiff alleged, among other things, that the defendant failed to adequately pay its drivers for State-mandated rest periods.  The plaintiff based its allegations on the fact that the defendant’s piece-rate compensation system determined an employee’s wages based on miles driven.  Importantly, the system also paid separate rates for specific, non-driving tasks, such as the number of pallets delivered and picked up, set-up time at stores, and traffic delays outside of an employee’s control.  The plaintiff contended that because the number of miles driven would necessarily not account for time spent during rest periods, the defendant’s pay policies violated California law. The defendant countered by alleging that compensation for time spent while on paid rest periods was subsumed in the mileage rate.  The appellate court overturned the trial court and ruled in favor of the plaintiff.  The court held that “rest periods must be separately compensated in a piece-rate system.”  The court echoed Armenta’s rule forbidding the averaging of hourly compensation to determine minimum-wage compliance and noted that because the defendant already had a method by which it paid employees for non-driving times, it could have (and should have) very easily added a line-item for wages earned during rest periods.

In each of these cases (and others, too), the employer paid certain employees on task-specific bases.  However, during times when employees were not performing those specifically identified tasks, employees were nonetheless required to remain under the control of their employers.  These cases demonstrate the Court’s somewhat liberal approach in construing when an employee is “under the control” of an employer.  For example, cleaning work stations, waiting for customers to arrive and accept goods, completing safety checks, picking up keys and manifests, filling out paperwork,  attending meetings and training sessions are all deemed “hours worked” and require due compensation.  Therefore, if you do not pay your piece-rate employees for these and every other task you require of them, you run a substantial risk of facing wage and hour violation liability. 

To determine the best way to protect your company from wage and hour violations arising from piece-rate compensation systems, obtain the advice of your knowledgeable wage and hour attorney who can assist you in crafting compliant pay plans and wage statements.