California Employers: Ignore Piece-Rate Compensation Rules at Your Peril

A recent California Court of Appeal decision upheld the state’s complex rules for compensating piece-rate employees. In Nisei Farmers League v. California Labor & Workforce Dev. Agency, 2019 Cal.App. LEXIS 10 (Cal.Ct.App. Jan. 4, 2019), the Court held that the Labor Code’s requirement that piece-rate employees be separately compensated for “nonproductive time” was not unconstitutionally vague. With California’s “productive vs. non-productive time” rubric firmly in place, employers must take great care to track and compensate piece-rate employees’ time, or face stiff penalties.

What Does “Piece-Rate” Mean, And Why Might An Employer Choose It?

Piece-rate compensation plans are very popular in some industries. They can incentivize employee productivity, while giving an employer greater control over labor costs. Under a piece-rate compensation system, the worker is paid a fixed amount of money for each unit produced or action performed, regardless of the number of hours worked. Industries that pay employees on a piece-rate basis include:

• Construction
• Manufacturing
• Transportation
• Delivery persons
• Auto mechanics
• Agricultural workers
• Cable installation
• Translation
• Data entry
• Carpet cleaning

Piece-based compensation can be an attractive option for both the employer and the worker. Unlike those who are paid hourly, these workers can increase their pay by increasing their output. Meanwhile, employers can more accurately tie labor costs to output and capacity (e.g., slabs poured, roofs completed, sinks installed, houses built). More productive workers benefit from knowing they are paid more than their less productive coworkers. Employers benefit from knowing they are paying employees for output, not for merely showing up for work.

The Impact Of Wage Laws On Piece-Rate Workers

All employees must be paid at least minimum wage for hours worked. This means that a piece rate worker’s weekly compensation has to convert into an hourly wage that is at least equal to minimum wage. Before 2016, employers used the averaging method to ensure that they were paying piece-rate employees at least minimum wage for all hours worked. The worker’s total piece rate compensation for the pay period was divided by total hours worked in the pay period. So long as that hourly rate was at least minimum wage, employers assumed that their minimum wage obligations were satisfied. Some employee advocates argued that this “average rate” method discouraged piece-rate employees from taking the rest and recovery periods that they were entitled to under the law. They reasoned that, because a piece-rate employee is only compensated for her output, any rest period or time spent waiting for available work (“non-productive” time) necessarily reduces her compensation. Although a few courts agreed with this reasoning, it was unclear whether the “average rate” method was still lawful. The Federal Labor Standards Act still permits the use of the “average rate.”

2016: New Piece Rate Legislation

That all changed in 2016, when the California legislature created Labor Code section 226.2, codifying prior Court of Appeal decisions holding that the “average rate” method did not fairly compensate piece-rate workers for their non-productive time. With the passage of this law, employers can no longer allow “nonproductive” work time to be lumped together with productive time when determining whether a piece-rate employee has been paid at least minimum wage. Thus, in addition to the employee’s piece-rate compensation, the employee must be paid separately for their nonproductive time, at the rate of at least equal to minimum wage.

Under Labor Code section 226.2, “non-productive” time is defined as:

• Rest and recovery periods
• Other time under the employer’s control that is not directly related to the activity being compensated on a piece-rate basis
  • Ex.: the time spent waiting for the next assignment, by an auto mechanic who is paid based on each repair or maintenance job performed

To make the matter even more complicated, Section 226.2 differentiates between rest and recovery periods, and other non-productive time. Rest and recovery periods must be compensated at either the employee’s average hourly rate or minimum wage, whichever is greater. Other non-productive time can be compensated at the minimum wage rate. As an alternative, the employer may elect to pay the employee both the earned piece rate compensation, and also pay the employee minimum wage for all hours worked.

What This Means for California Employers

Not surprisingly, such complex compensation rules can lead to tremendous liability for even honest mistakes by the employer. California’s Private Attorney General Act (PAGA) makes it very lucrative for attorneys to sue employers for wage and hour violations. Under PAGA, an attorney representing a single employee can bring suit on behalf of the employer’s entire workforce and, if a violation is found, collect a penalty of $100 per employee per pay period, going back one year. For even a medium-sized employer, this can amount to seven-figure penalties. An employee suing individually can collect penalties going back as much as four years, which can be equally costly.

What Should an Employer Do?

An employer utilizing piece-rate employees should carefully track the employees’ productive and non-productive hours, to ensure proper payment. Wage statements should, among other things, separately itemize the employee’s productive and non-productive hours, and corresponding compensation. An employer may wish to perform a payroll audit of its piece-rate employees, to ensure that all of the legal requirements are met. Any audit should be performed by or under the direction of the employer’s attorney, to ensure that its results are protected by the attorney-client privilege.

For more information about complying with California’s piece-rate compensation rules, or for assistance conducting a payroll audit, please feel free to contact Vida Thomas at 916.319.4669 or vida.thomas@stoel.com.