California Court of Appeal Decision May Signal the End of Piece-Rate Compensation Plans

by Snell & Wilmer

Many employers pay their employees on a piece-rate basis, meaning employees are paid a set amount based on the tasks they perform rather than the hours they work (e.g., assembly line employee paid $1 for every widget he assembles). Piece-rate compensation plans incentivize employees to be more productive – the more tasks completed, the more money earned.  These types of compensation plans have generally been upheld by federal courts as long as the average wage earned during the week is greater than the minimum wage rate. However, a recent California Court of Appeal decision sets a precedent for finding these types of compensation plans unlawful. 

Earlier this year, the California Court of Appeal, Second Appellate District, Division Two, decided Gonzales v. Downtown LA Motors LP, holding that California’s minimum wage law required employers who compensate employees on a piece-rate basis to also pay those employees a separate hourly wage for all time before, after and in-between tasks.

The employer in Gonzales, Downtown LA Motors (“DTLA”), paid its automotive service technicians a flat rate ranging from $17 to $32 for every “flag hour” worked. “Flag hours” were assigned to every task the technician performed on an automobile and corresponded to the actual amount of time the technician would need to perform the task. For example, if a brake repair was assigned four flag hours, a technician would be paid four times his flat rate for all brakes he repaired during the week. To ensure technicians were earning at least minimum wage, DTLA kept track of all time a technician spent at work. If a technician’s total compensation was less than the minimum wage rate multiplied by all hours spent at work, DTLA would supplement the technician’s pay. DTLA argued that its compensation method did not violate California’s minimum wage law because its service technicians earned more than if they were paid the minimum wage rate for every hour worked. 

However, the court found that, despite the total amount the technicians earned, DTLA’s compensation scheme violated California’s minimum wage requirement because it did not pay employees for “all hours worked”. Relying on an earlier decision, Armenta v. Osmose, Inc., the court distinguished California’s minimum wage law from federal law, and found that the averaging method used under federal law was inapplicable under California law. Under California law, “every employer shall pay to each employee…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.”  Further, “hours worked” is defined as “the time during which an employee is subject to control of an employer.” Therefore, since DTLA required technicians to remain at work while waiting for vehicles, it needed to pay them a separate wage during that time. 

After this decision, employers in California who pay employees on a piece-rate basis should pay an additional wage (at least minimum wage) for all time the employee spends while not performing a piece-rate task. While under federal law, piece-rate compensation plans may still be legal, if Gonzales sets a trend, employers will be required to separately pay piece-rate employees for every minute spent at work.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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