Piece Rate Employers Beware

Piece Rate Employers Beware

Yesterday, the California Court of Appeal issued some bad news for piece rate employers. The court ruled that employers must pay at least minimum wage for each hour of work. While that does not sound like anything new, it is. The court clarified what it means to pay minimum wage for each hour of work. It ruled that the practice of checking minimum wage compliance by calculating an average wage per hour for the pay period violates California law despite the fact that is it entirely permissible under federal law.

The case involved an auto dealer who agreed to pay mechanics by the number of productive hours they spent repairing vehicles. Under the dealer’s system, mechanics accumulated a defined number of hours for each type of repair. These were called “flag hours.” For example, an oil change might equal one “flag hour” while a complex brake repair might equal six “flag hours.” The total, “flag hours” accumulated during the pay period were then multiplied by the mechanic’s flat hourly rate to determine the total pay. In order to ensure compliance with minimum wage requirements, the dealer used the federal practice of averaging. It divided the total compensation earned in the pay period by the total hours worked during the pay period. If this per-hour average was less than minimum wage, the employee’s compensation was increased to meet minimum wage.

A class action of mechanics claimed that under the dealer’s system they were only compensated for the hours actually repairing vehicles, and received no pay for the hours they spent waiting for vehicles, cleaning their areas and doing miscellaneous non-repair jobs. The mechanics received “flag hours” only when doing actual repairs. They claimed further that California law required the dealer to pay at least minimum wage for each and every hour of work, and that the federal practice of averaging was not permissible. Both the trial court and the Court of Appeal agreed, and the dealer was liable for unpaid wages, penalties, interest, costs and attorneys’ fees.

Many of the piece rate and other incentive pay systems have roots back to development under federal law. Many industry practices also have roots back to federal law. Just because a practice is lawful under federal law or has been long standing does not mean it is lawful in California today. Employers who use any form of a piece rate or similar pay system should immediately analyze the system to ensure that it is in compliance with this latest pronouncement of California law.

The court’s opinion can be viewed at http://www.courts.ca.gov/opinions/documents/B235292.PDF