December 15, 2015

New Rules for Piece-Rate Employees and Limited Safe Harbor

On October 10, 2015, Governor Jerry Brown signed into law AB 1513, which adds a new section to the Labor Code and codifies recent California state appellate court and federal district court decisions ruling that piece-rate employees must be separately paid for their nonproductive time and rest periods, in addition to their piece-rate earnings.  The new law also provides a limited safe harbor for qualified employers that voluntarily make retroactive payments to piece-rate employees for uncompensated nonproductive time and rest periods.  AB 1513 will go into effect on January 1, 2016.

Courts Redefine Piece-Rate Rules
In 2005, the California Court of Appeal decided Armenta v. Osmose.  In Armenta, the employees installed and maintained utility poles.  The company paid the workers for time spent actually working on utility poles (“productive time”) and didn’t pay for time spent during all other activities (“nonproductive time”).  The employees filed a class action lawsuit alleging that the employer failed to pay them the minimum wage for their nonproductive hours.  The employer claimed that the plaintiffs had been paid at least the minimum wage because under then-prevailing federal law, an employer could use a simple average to determine if the employer had satisfied the minimum wage.  In other words, it had been understood that under California law, if total compensation divided by total hours was greater than the minimum wage (accounting for overtime), minimum wage requirements had been met.  The Armenta court held that California’s minimum wage statute required that the minimum wage must be paid each and every hour an employee works.  Dividing total compensation by total hours to determine if the minimum wage had been satisfied (i.e., “averaging”), was held impermissible under California law. Notably, Armenta did not involve piece-rate employees.
In March 2013, the California Court of Appeal applied the reasoning of Armenta and ruled in Gonzalez v. Downtown LA Motors that auto mechanics paid on a piece-rate basis were required to be paid at least the minimum wage for hours spent waiting to perform car repairs.  In its ruling, the Court of Appeal noted that California law requires that employees be paid “not less than the applicable minimum wage for all hours worked in the payroll period, whether the remuneration is measured by time, piece, commission, or otherwise” (emphasis added).
Two months later, the Court of Appeal ruled that truck drivers paid on a piece rate had to be separately compensated at the minimum wage or the contracted hourly rate for their two 10-minute rest periods under a piece-rate system.  These cases stood for the proposition that employers can no longer show that the required minimum wage has been paid by averaging the total compensation over the total number of hours worked in the pay period as permitted by the Fair Labor Standards Act (FLSA).  The California Supreme Court denied review in both cases.
This shift in the historic understanding of how piece-rate workers are to be compensated was soon adopted by several federal district courts.  For example, in Con-Way Freight v. Quezada, the court held that truck drivers who were paid a piece-rate based on a pre-set mileage rate and who were also paid on an hourly rate for work performed such as loading and unloading had not been paid any wages for certain non-driving tasks, such as vehicle inspections and waiting time at each stop.  According to the employer, this time spent on “nonproductive” activities was properly included in the piece-rate compensation system.  As in the Downtown LA Motors case, the court ruled that California law required that this non-driving time be paid at a separate hourly rate, equal to at least the minimum wage.
Even before Bluford and Downtown L.A. Motors, minimum wage cases relying on Armenta were popping up against employers who pay by the piece.  But once the California Supreme Court declined to consider these cases for review, they became the law of the land in California.  Predictably, the flood gates opened and during the intervening years dozens of class action lawsuits have been filed against California agricultural employers — and other industries — for uncompensated non-productive time and rest periods, with new cases still being filed on a regular basis.  Since these court decisions purported to interpret existing law, every employer of piece-rate employees is vulnerable to being named in a class action lawsuit to which there is no defense.
These class action lawsuits are devastating not only because the employer must pay back wages to all affected current and former employees going back three to four years, they must also pay civil and statutory penalties, liquidated damages, attorneys’ fees (both their own and class counsel’s) and costs, all of which increases the potential exposure to sums exponentially greater than the underlying wage claim.

Changes Implemented by AB 1513

Nonproductive Time
AB 1513 adds section 226.2 to the state Labor Code which requires (after January 1, 2016) that piece-rate employees be separately compensated for “other nonproductive time” at an hourly rate no less than the applicable minimum wage.  This essentially codifies the holding of Downtown LA Motors.  Section 226.2 defines “other nonproductive time” to mean “time under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis.”  While this definition lends some clarity as to what constitutes “other nonproductive time”, some ambiguity remains.  Calisthenics and tail gate meetings, for example, clearly count as other non-productive time, activities which must be separately compensated.  But the harvest machine turning at the end of the row is directly related to the activity being compensated on a piece-rate basis, according to sources who negotiated the bill, and is compensated with piece-rate earnings.  An employer that pays an hourly rate of at least the applicable minimum wage for all hours worked plus a piece-rate production bonus is deemed to be in compliance with the law and is not required to track or separately pay other nonproductive time (but is required to separately pay rest and recovery periods at the regular hourly rate of pay).

Rest and Recovery Periods
New section 226.2 requires that piece-rate employees be separately paid for rest and recovery periods at “a regular hourly rate that is no less than the higher of an average hourly rate determined by dividing the total compensation for the workweek, exclusive of compensation for rest and recovery periods and any premium compensation for overtime, by the total hours worked during the workweek, exclusive of rest and recovery periods, or the applicable minimum wage.”  This rate of pay is higher than that announced in Bluford, which required rest periods to be paid at the higher of the minimum wage or contracted hourly rate.  However, the rate is lower than the Labor Commissioner’s interpretation that rest periods must be paid at the average piece-rate, because the average hourly rate includes payments for other nonproductive time paid at the minimum wage.  This rate covers rest breaks under Industrial Welfare Commission Wage Order 14-2001 and cool down breaks under the Cal/OSHA heat illness prevention regulation (CCR Title 8, Section 3395).
New section 226.2 also has new paystub requirements for piece-rate employees. In addition to the nine different categories of information that must be included on all wage statements as enumerated in section 226(a) of the Labor Code, piece-rate employees’ itemized statements must now separately state:
•    the total hours of compensable rest and recovery periods, the rate of compensation, and the gross wages paid for those periods during the pay period; and
•    the total hours of other nonproductive time, the rate of compensation, and the gross wages paid for that time during the pay period.

Limited Safe Harbor
The Downtown LA Motors and Bluford decisions have created enormous exposure to back pay and penalty liability to employers of piece-rate employers.  AB 1513 offers some relief for employers who have been sued or face probable liability for uncompensated nonproductive time and rest periods.
Provided the employer satisfies all of the stated requirements by December 15, 2016, it may assert an affirmative defense to all liability, including back wages and penalties, for failure to compensate for rest and recovery periods and other nonproductive time.  However, plaintiffs’ attorneys that filed an action prior to October 1, 2015 may request attorneys’ fees and costs from the court . To take advantage of the safe harbor, the employer must:
•    Make retroactive payments to all current and former employees for the amount of break and other non-productive time not separately compensated (as now required by the statute) during the period July 1, 2012 through December 31, 2015.  The statute gives the employer two options as to how to calculate these payments:
•    Pay the actual amount of wages due for uncompensated break and nonproductive time, plus interest; or
•    Pay four percent (4%) of the employee’s gross earnings during that period. If the employer has previously tried to come into compliance with Gonzalez and Bluford by compensating employees for nonproductive and/or break time, the employer will get a credit for those payments (with a cap of 25% of the amount due for other nonproductive time and no limit for rest and recovery.)
•    The employer must make a good faith effort to locate former employees and provide payments to each one who would qualify, or for employees who can’t be located, to the Labor Commissioner.
•    The employer must provide written notice to the Department of Industrial Relations by July 1, 2016 of its intention to make retroactive payments.
Provided all requirements are satisfied, the employer can assert the affirmative defense in any claim or action filed on or after March 1, 2014, unless judgment has already been entered and the time for appeal expired by the end of 2015.  The affirmative defense will defeat any claim against the employer for failure to timely pay the employee separately for rest and recovery periods and other nonproductive time through December 31, 2015.  After December 31, 2015, all employers must separately pay for other nonproductive time and rest and recovery periods as set forth in new section 226.2 of the Labor Code.
Western Growers members that pay employees on a piece-rate basis should be prepared to modify their payroll systems to comply with AB 1513’s compensation and wage statement requirements.  Qualified employers should consult with employment law counsel to determine if they may be able to take advantage of the safe harbor and enjoy relief from liability in current or probable class action litigation.

How to Calculate Employee Payments Using the 4% Formula

Step One:    Determine by employee the gross wages earned after July 1, 2012, for each pay period in which the employee worked for any time at a piece-rate. Do not include pay periods where all compensation for the pay period was at a fixed hourly rate.

Step Two:    Multiply that number by 4% to determine the amount due.

Step Three:    Subtract what was actually paid in the pay period for rest and recovery (R&R) and other nonproductive time (NPT).

Example for One Pay Period:

The employee’s gross earnings were $800.00.  $20.00 was previously paid for rest and recovery periods (calculated at $10.00 per hour for two hours of rest-period time).  $8.00 was already paid for other nonproductive time (capped at 1% of the employee’s gross earnings or 25% of amount due).

Gross Earnings    $800.00
Multiplied by 4%    $32.00

Paid R&R    $20.00
Paid NPT    $8.00

Employer pays: 4% – (Paid R&R + NPT) = $32 – $28 = $4.00 Due Employee