PIECE RATE AND COMMISSION BASED PAY PLANS MAY NOT SATISFY CA MINIMUM WAGE REQUIREMENTS

California Court of Appeal requires employers to pay separate hourly wage for non-piece rate work and waiting time; Federal District Court reaches similar conclusion for commission-based pay

By Michael Early

Piece Rate Pay Plan Held to Violate California Law

In  Gonzalez v. Downtown LA Motors, 2013 WL 820723 (March 6, 2013)*, the Court of Appeal for the Second District held that an auto dealership that paid employees for repair work on a piece rate basis must also separately pay those employees at the minimum hourly rate for waiting time and for time spent doing other work.  The court held that the employer did not meet its minimum wage obligations even though it insured that its piece rate employees’ average hourly rate exceeded the minimum wage.  The Court of Appeal therefore affirmed an award of $1.5 million to a class of 108 employees based on their average uncompensated waiting time.

In Gonzalez, the defendant paid its repair technicians a flat rate (ranging from $17 to $32 per hour) for each “flag hour” a technician accrued.  The number of “flag hours” assigned to repairs was based on a fixed amount of time expected to complete each repair.  Employees were paid based on the number of flag hours assigned to each repair task, regardless of how long the task actually took to complete.

As with most piece rate pay systems, defendant’s employees only accrued flag hours for the repair work they were given.  Time spent waiting for repair orders or performing other duties was “unpaid.”  To insure that employees were compensated at or above the minimum wage rate for all hours worked, defendant calculated what each employee’s pay for all hours worked would have been at the minimum wage and, if necessary, supplemented the employee’s pay to meet that amount.  Defendant argued that its pay system satisfied California’s minimum wage laws because every employee earned at least the minimum wage for all hours worked.

The Court of Appeal disagreed.  The court held that Wage Order No. 4, subdivision 4(B), which requires payment of the minimum wage “for all hours worked,” requires that employees be compensated at the minimum wage for “each and every separate hour worked.”  Since defendant’s employees were only paid based on the piece rate or “flag rate” for repair work they performed, they did not earn any direct compensation for time spent waiting for repair work or performing other tasks.  The failure to pay the minimum wage for time spent waiting for repair work or performing other tasks could not be rectified by averaging the employees’ piece rate compensation over all hours worked.

The court further held that defendant’s compensation scheme violated California Labor Code sections 221 and 223, which require an employer to pay all employee hours at the statutory or agreed rate, and prohibit an employer from improperly collecting wages paid to an employee.  The court held that averaging piece rate wages over total hours worked “results in underpayment of employee wages under Labor Code section 223, as well as an improper collection of wages paid…under Labor Code section 221.”  Since the average hourly rate actually paid to defendant’s employees was lower than the flat rate they were promised for repair work under their employment contracts, the court held that the defendant was effectively crediting wages accrued during “flag” hours to pay non-piece rate hours in violation of these Labor Code provisions.

Commission-Based Pay Plan Held to Violate California Law

The Gonzalez case falls fast on the heels of a federal court decision on commission-based pay from the Southern District of California, Balasanyan v. Nordstrom, Inc. , — F.Supp.2d–, 2012 WL 6675169 (S.D. Cal. Dec. 20, 2012).  In Balasanyan, a federal judge reached a similar conclusion respecting Nordstrom’s sales associate commission plan.

Nordstrom pays its sales associates a commission based on net sales.  Like the defendant in the Gonzalez case, Nordstrom sought to insure compliance with minimum wage laws by calculating each employee’s minimum hourly rate for all “selling time” and supplementing any employee’s pay, if necessary, to insure that it was at least equal to the minimum wage rate for all “selling time” hours.  Nordstrom’s “selling time” includes 1.5 hours of non-commission producing work (such as stocking) per shift.  While Nordstrom separately paid employees an hourly rate for “non-selling time,” the non-commission producing work included in “selling time” hours was only compensated based on commissions earned (or by Nordstrom’s supplementation of an employee’s pay).

Plaintiffs brought claims under both the federal FLSA and California law asserting that their commission pay could not be used to compensate them for time spent on non-commission producing activities.  Nordstrom moved for summary judgment on both claims.  The District Court held that Nordstrom’s compensation plan was lawful under the FLSA, because employers are permitted under the FLSA to average employee wages over total time worked in a week to determine if FLSA minimum wage requirements are satisfied.  Since Nordstrom guaranteed pay at or equal to the federal minimum wage through commissions (or by supplementing) based on “selling time” hours, FLSA minimum wage requirements were met.

As in Gonzalez, however, the District Court held that Nordstrom’s commission plan violated California law because it averaged employee wages over total hours worked, and failed to compensate them at the minimum wage for “each and every separate hour worked.”  The District Court rejected Nordstrom’s argument that stocking and other duties were compensated through sales commissions because such duties were related to (and increased) sales and sales commissions.  The District Court held that “compensation must be directly tied to the activity being done,” and that “activities that are only indirectly related to sales or services must also be [separately] compensated.”  Since Nordstrom’s employees were not compensated directly for stocking or other work, those hours were in essence uncompensated by Nordstrom’s commission plan under California law.

The trial court therefore denied Nordstrom’s motion for summary judgment on plaintiff’s California minimum wage claims.  Nordstrom’s request for permission to file an interlocutory appeal of the summary judgment order was denied last month.

Analysis

There are several objections to the decisions in these two cases.  Both cases relied heavily on the decision in Armenta v. Osmose, Inc., (2005) 135 Cal.App.4th 314.  In Armenta, the plaintiffs were employed by a company that maintained utility poles in remote areas.  Although paid (per a collective bargaining agreement) well above minimum wage, plaintiffs were not paid for hours spent traveling to and from job sites, loading vehicles, or attending safety meetings.

In Armenta, the employer contended that the minimum wage laws were satisfied because total employee compensation exceeded the minimum wage for the all hours worked.  This contention was, of course, rejected.

Armenta is distinguishable on several grounds.  First, both pay structures are distinguishable from Armenta because defendants guaranteed their employees the minimum wage for every hour worked, leaving no work time uncompensated.  Second, the guarantees of the employers in Gonzalez and Balasanyan insure minimum employee compensation, while the piece rate and commission based components of the pay plans incentivize employees to increase their compensation based on productivity and sales.  Third, there is a logical disconnect between the right to pay an employee based on a piece rate system that includes a guarantee that their hourly wage will not fall below the minimum, and the court’s insistence that an employee must be paid separately for every hour of work, regardless of whether the employees were “making pieces.”

Recommendations

The deadline for appellate review has not passed for either of these decision, and it is possible that a higher court may reach a different conclusion.  Nevertheless, California employers should review their piece rate and commission-based pay plans to determine whether employees are directly paid at least minimum wage for each hour worked.  If employees under these plans have uncompensated waiting time hours or perform duties that are not directly compensated through piece rate or commission wages, employers should consider modifying their pay plans to avoid potential liability for failure to comply with California’s minimum wage laws.

*A publication order for this previously unpublished opinion was entered by the court on April 2, 2013.

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