Governor Edmund Gerald Brown, Jr. signed into law legislation that re-writes the definition and rules governing the payment of piece-rate compensation in California. Assembly Bill (AB) 1513 creates new California Labor Code section 226.2 and sets forth requirements for the payment of a separate hourly wage for “nonproductive” time worked by piece-rate employees, and separate payment for rest and recovery periods to those employees. The legislation builds on California appellate court decisions in
Gonzales v. Downtown LA Motors, 215 Cal. App. 4th 36 (2d App. Dist. Mar. 6, 2013) and
Bluford v. Safeway, Inc., 216 Cal. App. 4th 864 (3d App. Dist. May 8, 2013). The law has profound implications for employers, including agricultural and transportation companies, which historically compensate employees based on piece-rate and activity-based formulas. There is, however, good news for some employers subject to the legislation who have not yet been, or have only recently been, the subject of class action litigation based on a failure to pay wages in accordance with these recent cases. New Labor Code section 226.2 provides a limited safe harbor for employers that 1) have not been sued regarding these issues prior to April 2014, 2) come into compliance with all of the obligations now described in section 226.2 before the end of 2015, and 3) pay actual or liquidated damages by the end of 2016. All employers that have paid piece rate or activity based pay must seriously consider the options provided by this legislation.
New Labor Code Section 226.2 Requires Separate Hourly Pay for Rest and Recovery Periods and “Nonproductive” Time Worked by Piece-Rate Employees AB 1513 creates new section 226.2 of the California Labor Code, which applies to all employees compensated on a piece-rate basis.
[1] The new section, which will become effective January 1, 2016, codifies three, basic statutory requirements for the payment of employees on a piece-rate basis:
- Employees must be separately compensated for the time to take rest and recovery breaks. These breaks must be paid at an hourly rate no less than the greater of either the applicable minimum wage or the employee’s average hourly wage for all time worked (exclusive of break time) during the work week.
- Employees must be separately compensated for “other nonproductive time,” which is defined as “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.” Notably, the statute does not define “activity,” and thus does not resolve the practical difficulty created by Cardenas, Gonzalez, and related cases holding a piece rate must separately compensate each duty performed. Employers will still face challenges defining what “activity” is compensated by a piece-rate and what closely related activities are not compensated by the piece rate. Employers will have the additional complication of determining what work time is spent in activities that are not “directly related” to the piece rate compensation plan.
- Section 226.2 provides that this “other nonproduction time” time must be compensated at an hourly rate no less than the applicable minimum wage. The statute provides that the amount of “other nonproductive time” to be paid may be determined either by actual records or by the employer’s “reasonable estimate,” but the statute provides no further direction on what differences may exist between the “actual records” or the employer’s “reasonable estimate.”
- Employee wage statements will be required to include the following information, besides that which is already required under existing Labor Code section 226(a):
- The total hours of compensable rest and recovery periods, the rate of compensation for those periods, and the gross wages paid for those periods during the pay period.
- The total hours of other nonproductive time, the rate of compensation for that time, and the gross wages paid for that time during the pay period.
Employers will be able to satisfy the requirement to pay for other nonproductive time by paying minimum wage for all hours worked, in addition to any piece rate. The employer is not required to specify information regarding the other nonproductive time on its wage statements. Employers who have employees in California paid on any productivity or piece-rate basis should examine the statute carefully and consult counsel to be sure they comply with these requirements by the end of the year.
The Limited Safe Harbor May Provide Some Relief for Employers Who Have Piece Rates and Who Were or Could be Sued for Failing to Pay for “Nonproductive” Time The
Cardenas,
Gonzalez, and
Bluford decisions created enormous back-pay and civil- and statutory-penalty liability for employers with longstanding piece-rate compensation practices that were previously considered fully compliant with minimum wage requirements. Class action lawsuits have abounded. AB 1513 provides limited relief for employers facing recently filed litigation on these claims, or who fear they could face liability if such a claim is filed now that the statute has codified these concepts. Section 226.2 provides that an employer may assert an affirmative defense to all liability for failure to compensate for rest and recovery periods and other non-productive time
if it satisfies
all of the following requirements by
December 15, 2016:
- The employer makes payments to each of its 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. These payments may be calculated using either of the following methods (at the employer’s election):
- The actual amount of wages due for the break and nonproductive time that must be separately compensated, plus interest; or
- Four percent (4%) of the employee’s gross earnings during that period. If the employer paid additional amounts to cover some of what is now considered other nonproductive time, those amounts (up to 1% of gross earnings) may be deducted from the payments, for a minimum payment of 3% of gross earnings.
- The employer makes a good faith effort to locate and provide these payments to each of its former employees who would qualify.
- The employer provides written notice to the Department of Industrial Relations by July 1, 2016 of its intention to make these payments.
If an employer satisfies these requirements, it can assert this 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 precludes any liability, whether asserted as wages, damages, liquidated damages, statutory penalties, or civil penalties, based solely on the employer’s failure to timely pay the employee separately for rest and recovery periods and other nonproductive time for time through
December 31, 2015. Depending on the calculation of the payment required under this safe harbor, some employers may be able to take advantage of significant relief from potential liability in current or probable litigation, easing the transition to an alternative compensation plan that complies with the payment requirements of the new statute.
BY RICHARD H. RAHM AND ANGELA J. RAFOTH
We hope this information is valuable to you. If you have any questions, please do not hesitate to contact Holman HR.
[1] Importantly, although the safe harbor affirmative defense would preclude liability for failure to compensate employees for rest and recovery periods that must be paid, it does NOT impact any claims based on the employer’s alleged failure to provide such breaks.
