Quirky Question # 225, California Law Is Not Going to Pieces

by Dorsey & Whitney LLP
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Question:

We are located in California and would like to change to a piece-rate system where we pay non-exempt employees a set amount for completed tasks.  I understand that this is referred to as paying for a “piece-rate” and it is legal as long as the employee is compensated at least at the minimum wage for all hours worked.  Is this correct?

Answer:

While a piece-rate can be used, it must be drafted carefully to include a calculation of pay for non-productive hours including mandatory 10-minute rest periods.   Two recent state court decisions and one federal court decision concluded that piece-rate pay does not compensate for all hours worked, but, instead, compensate only for “productive” work time, that is, time which directly related to producing the “piece.”

The first decision, Gonzalez v. Downtown LA Motors, 215 Cal. App. 4th 36 (2013), held that the time automobile mechanics spent waiting for repair jobs had to be separately compensated at the minimum wage because that waiting time was not paid for by the fixed “flag rate” pay mechanics earned for each repair job.

In the second decision, Bluford v. Safeway Stores, Inc., 216 Cal. App. 4th 864 (2013), a class-action lawsuit was brought on behalf of unionized truck drivers who worked throughout Northern California.  Per the compensation plan under the collective bargaining agreement (“CBA”), drivers’ wages were based on a mileage rate for miles driven and their hourly rates varied by task.  There was no means for recording or paying the drivers for rest periods.  Employees were not paid a separate rate for paid rest periods, and there was no indication on the employees’ wage statements that time spent on rest periods would be paid.  Safeway argued that its piece-rate system had been designed to include rest periods and thus compensated for them.  The trial court, apparently accepting this argument, denied class certification, reasoning that individual inquiries into the reason an employee missed a rest period would predominate over common questions.

The Court of Appeals held that the trial court’s denial was improper because the plaintiffs’ theory of recovery – that drivers were not compensated for the rest periods they did take – had nothing to do with reasons for taking or not taking a rest period.  The Court held that the question whether the piece-rate system compensated for rest periods was a common one, and then addressed the merits and found the system unlawful.  None of the system’s compensation components directly compensated drivers for rest periods, which violated the requirement that rest periods be paid.  The Court held that even though Safeway had a written policy to provide paid rest periods, under a piece-rate system, rest periods must be separately compensated.  Before this decision, rest periods had always been permitted to be included as part of piece-rate and commission plans.  The Court concluded that to accept the argument that the piece-rate pay included rest period compensation would be akin to averaging pay to comply with the minimum wage law, which is disallowed under California law pursuant to Armenta v. Osmose, 135 Cal. App. 4th 314 (2005).

A California federal district court recently embraced this piece-rate rule.  In Con-Way Freight v. Quezada, 2012 WL 2847609 (N. D. Cal. July 11, 2012), drivers’ compensation was calculated by multiplying a pre-set mileage rate by the number of miles in a trip.  Drivers were separately paid an hourly rate for other work such as loading and unloading freight, but were not paid for pre-and post-trip vehicle inspection time or certain waiting time.  Con-Way treated non-driving time as being built into the per-mile rate.  Like the two state courts, the federal court ruled that California law did not permit an employer to wrap the non-driving time into the piece-rate mileage system; rather, that time must be paid at a separate hourly rate, equal to at least the minimum wage.

Thus, a piece-rate system should, at a minimum, have an alternative calculation which compensates employees for the unproductive hours – including rest periods – at the minimum wage or higher.  Keep in mind, too, that when calculating overtime compensation in a piece-rate system, both the piece-rate earnings and the separate hourly pay must be included in the worker’s regular rate of pay.  The piece-rate situation is just one of the many challenges employers face when calculating overtime for employees who earn different forms of compensation.  We addressed this issue recently in discussing how holiday bonuses may affect overtime calculations.

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