June 6, 2016

Countdown to Piece-Rate Safe Harbor Election

July 1, 2016, is the last day California employers may elect to avail themselves of the safe harbor provided under AB 1513. Enacted January 1, 2016, AB 1513 provides most employers an affirmative defense from class action lawsuits for having failed to pay piece-rate workers separately for “other non-productive time” or mandated rest and recovery periods. But that protection is only available to eligible employers who undertake certain steps. Step number one is to complete and submit by July 1 the piece-rate back pay election form found on the Department of Industrial Relations’ Piece-Rate Legislation (AB 1513) page on its website.


Do the Math

Before electing to go into the safe harbor, employers will have to decide if it makes sense do so. How does an employer decide if it should take advantage of the safe harbor? Entering the safe harbor means that the employer may be required to make substantial back wage payments to piece-rate employees for time periods prior to and including December 31, 2015. Employers should run a cost/benefit analysis, comparing the amount that would be owed under the safe harbor provision with the potential exposure to damages, including statutory and civil penalties, liquidated damages and attorneys’ fees that would be owed if a class action lawsuit was to be filed against the employer. While determining that potential exposure is a time consuming and arduous task, a good back-of-the-envelope estimate is to take the back wages multiplied by 30. So, for example if the total back wages owed is $50,000, an employer may reasonably expect to pay $1.5 million to settle a class action claim. In virtually all cases, the amount of back pay owed would be substantially less than that figure. In addition to comparing the differential in cost to resolve the issue, employers may also consider the likelihood of being named in a lawsuit, the time and effort required of staff to defend a lawsuit, and morale issues emanating from employees who are aware of the new law and are expecting, but don’t receive back payments.


Make the Election

The election form is a simple one page web-based form. It has several mandatory fields, including the name and DBA of the employer, and its business and mailing address (if different). The form also requires the employer to list “other locations where the employer does business (or has done business) using employees who will be receiving payments.” It is not clear from the law or the guidance how specific the employer must be when listing locations. Some employers have listed the address of each and every location where piece-rate employees have worked over the past three and a half years, while others only list the counties where the worksites are located. While either option is acceptable, if you list specific worksites and inadvertently omit one or more locations, you will not be able to enjoy the benefit of the safe harbor for employees who worked at those locations. The form also has optional fields for the employer’s point of contact information and data fields for the number of affected employees and estimated amount of payments. Again, these fields are optional.


Make the Payments

In order to get into the safe harbor, the employer must make payments to each of its current and former employees, with some limited exceptions, for previously uncompensated or undercompensated rest and recovery periods and other nonproductive time from July 1, 2012, to December 31, 2015, using one of two methods prescribed by the statute. The first payment option is to determine and pay the actual sums due together with 10 percent interest. This method is tricky because most employers did not track other non-productive time, so it’s exceedingly difficult to calculate how much other non-productive time to pay.

The other method is to pay each employee 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. The employer can deduct without limit, from this amount wages already paid to that employee, separate from piece-rate compensation, for rest and recovery periods. For other nonproductive time already paid, the employer can deduct those prior payments up to 1 percent of the employee’s gross earnings during the same period. In other words, the 4 percent only applies to pay periods in which work was performed on a piece-rate or hourly plus production bonus basis.

In addition to submitting the election notice by July 1, 2016, the employer must also do the following to get into the safe harbor:

•   The payments must be completed by December 15, 2016.

•   The payments to employees must come with a statement summarizing how the payment was calculated.

•   Use due diligence (such as using locator services) to locate and pay former employees who have relocated.

•   Payments for former employees who cannot be located must be made to the Labor Commissioner’s Unpaid Wage Fund (with an additional administrative fee).

Payments are not required for employees who have previously settled claims for uncompensated or under-compensated rest and recovery periods and other nonproductive time.

When an employer elects to make back payments under AB 1513, the employer must provide the employee, along with the payment, a statement that generally explains that the payment is made pursuant to AB 1513, and describes the formulas and calculations used to determine the total payment.

Employers who timely elect to make the back payments are displayed on a public list of employers who have submitted a Notice of Election to Make Back Payments. It is likely that class action employment lawyers will comb the list and seek to sue employers that aren’t on it. For many employers of piece rate employees, they will want to be on that list and sleep better at night.