One of the many new bills signed by the Governor adds new obligations for employers that utilize a piece rate compensation plan and affords a very brief amnesty period for past violations. The new law, which is  effective January 1st, adds Section 226.2 to the California Labor Code. This FAQ summarizes the key provisions of the new law.

Background.

California and federal wage laws require that employees be paid for all hours worked at a rate which is no less than the applicable minimum wage.

Employers also have the option of paying employees on some other basis tied to the employee's production.  This latter method is often referred to as a "piece rate" in reference to the fact that a portion of the pay is calculated by counting how many units of production are completed within an allotted period.  Employers and employees like this system, as it provides an economic incentive for the more productive employees.  If the employee is paid the applicable minimum wage for all hours worked, and the piece rate is an added incentive, then compliance is not compromised.

However, according to a pair of 2013 California Court of Appeal cases, if the piece rate is intended to meet all or part of the employer's minimum wage obligation, then things get dicey legally.  Prior to those rulings, many employers were under the erroneous belief that compensating employees on a piece rate basis is simply a matter of ensuring that their employees' total compensation for the week was no less than the minimum wage (with overtime pay being paid whenever the employee worked any overtime).

To the chagrin of employers that use piece rate pay plans, these court cases drew a sharp distinction between the production work which the employee was performing to actually earn the piece rate (the so-called "productive" time), and any other time during the work day where the employee was still under the employer's control (and needs to be paid).  According to these courts (as well as several federal courts which dealt with the same issue), even if the employee's piece rate earnings are well above the minimum wage when all work hours are tallied at week's end, the employee nevertheless must be paid an additional sum (at no less than minimum wage) for all of the other non-production time during which the employee is in service to the employer. These cases made clear that under California law, an  employer may not take a credit against these obligations for the extra pay which the employee earned under the piece rate.  This would include, for example, the state's  mandated paid rest breaks and heat recovery periods. (By comparison, under federal law, no violation occurs if the employee's total compensation averages out to be at least the minimum wage.)

Q.           Which employers are covered by the new law?

A.            All employers in California who pay employees on a piece rate basis are covered by the new law.  There are no exceptions for small employers, or employers that are covered by a union contract.

Q.           What is considered a piece rate?

A.            A piece rate includes any method of compensating employees that is measured by the employee's completion of certain tasks.  For example, employees in the garment industry are frequently paid by the number of pieces they sew.  Truck drivers that are paid on a per delivery or mile basis, or auto mechanics that are paid a "flag rate" for completing particular repairs, are also considered piece rate workers.

Q.           How does the new law affect the way employees must be paid for breaks?

A.            Under existing law, rest and so-called heat recovery periods are considered paid time.  Since employees on state mandated rest breaks and  heat recovery breaks are by definition not engaged in productive work that is measured by the piece rate formula, the new law establishes a method to pay employees for such time.

Under the statute, rest and recovery periods must be paid at the higher of:  (1) the employee's average hourly rate for the workweek, or (2) the applicable minimum wage.  The average hourly rate is calculated by dividing the employee's total compensation for the workweek (excluding compensation for rest and recovery periods and premium overtime pay) by the total hours worked during the workweek (excluding time spent on rest and recovery periods).  The minimum wage is the state minimum wage ($10/hour as of January 1, 2016), or any higher minimum wage that is established by statute(e.g., prevailing wage laws on public works jobs), or by local ordinance (e.g., the Los Angeles  "living wage" ordinance).

Q.           Must employees also be separately paid for other work that is not measured by the piece rate   formula?

A.            Yes.  Under the statute, all other "non-productive" time must be separately compensated by at least the minimum wage.  Other "non-productive" time is defined as any time that is under the employer's control (other than rest and recovery periods) that is not directly related to the tasks that are measured by the piece rate formula.

For example, an auto mechanic that is paid on a "flag rate" must be separately paid at least the minimum wage for time spent cleaning the shop, setting up, and waiting for repairs.  Truck drivers that are paid per mile must be separately paid at least the minimum wage for non-driving time, such as time loading and unloading the truck, waiting for inspections, getting gas, etc.

Q.           How does an employer measure other "non-productive" time?

A.            Under the statute, the amount of other non-productive time can be determined through the employer's actual records, or the employer's reasonable estimate.  The statute provides steps an employer must follow to correct any errors that may have been made when calculating other non-productive time.

An employer who pays an hourly rate of at least the minimum wage for all hours worked in addition to a piece rate will be considered to have complied with this requirement.  Rest and recovery periods must still be paid by using the average rate method.

Q.           Are there new paystub requirements for piece rate workers?

A.            Existing law already requires that employees are provided with a paystub that includes the number of piece rate units completed during the pay period, the piece rate, and the total piece rate earnings (in addition to other requirements such as total regular and overtime hours worked, deductions, etc.).

The new statute creates additional paystub requirements.   The paystubs must also include:  (1) total hours of compensable rest and recovery periods; (2) the rate of pay and gross wages for rest and recovery periods; (3) and total hours, rate of pay and gross wages paid for other non-productive time.

Employers must also keep records of all hours and pay for rest and recovery periods and other non-productive time until at least December 16, 2020, and provide copies to employees upon request.

Q.           Are employers required to pay employees for past rest and recovery periods and other non-   productive time?

A.            Yes.  However, the law has a short amnesty period for employers that correct the error. The new law says that the  Employer will have a defense to past claims if, by December 15, 2016, employees have been paid for any unpaid or underpaid rest and recovery periods and other non-productive time that occurred during the period July 1, 2012 to December 31, 2015.

There are very strict requirements that must be satisfied before this so-called safe harbor applies, including providing the State Labor Commissioner with details of the payments that are then posted on the agency's website.

Employers are also obligated to use due diligence to track down former employees so they can pay them what is owed for the past.  If former employees cannot be located, employers must pay their amounts to the State Labor Commissioner.

With the very short amnesty window, and the January 1st compliance deadline, your contact at the firm is ready to assist you in getting into compliance with these complex new requirements.

If you have any questions about the contents of this article, you may contact any member of the Firm. We can be reached at (818) 508-3700, or online at  www.brgslaw.com.