New Piece Rate Law Provides Employers Some Relief; But With A Catch

Article by Brian Ewing

Employers who pay their employees by “piece-rate” instead of paying the typical hourly wages now need to comply with AB 1513.  The new law forces costly new requirements on employers who pay piece rate wages, but also provides some needed clarity in light of recent class action litigation in this area.  Importantly, the bill also has a safe harbor provision to help companies avoid lawsuits if they make the necessary changes and pay certain back wages owed.  The safe harbor is important because courts have already found companies liable for wages and penalties to piece rate employees for the types of down time covered by the new law.

The new law requires that piece rate workers be paid a separate hourly wage, in addition to their piece rate wages, for time spent taking legally mandated paid rest periods (and “recovery” periods) and for other “nonproductive time.”  Nonproductive time is defined as work time “that is not directly related to the activity being compensated on a piece-rate basis.”  It remains to be seen how loosely the courts will interpret this language.  Inconveniently for employers, these two types of down time are paid in different ways.

Rest and recovery periods must be paid at an hourly rate that is the higher of (1) an average hourly rate determined by dividing the total compensation for the workweek (exclusive of compensation for rest and recovery periods and overtime premiums) by the total hours worked during the week (exclusive of time for rest and recovery periods) or (2) the highest federal, state, or local minimum wage applicable to the employer.  This average hourly rate for rest and recovery periods must be calculated over a workweek.  For companies who pay semi-monthly, whose pay periods can close before this average hourly rate can be determined for the week, the rest/recovery period time must be paid at the applicable minimum wage, and additional wages owed, if any, based on the average hourly rate calculation must be paid to employees in their next paycheck.

Nonproductive time is simply paid at the applicable federal, state or local minimum wage.  However, a company that pays, in addition to piece rate wages, an hourly wage for all hours worked that is at or above the applicable minimum wage is automatically in compliance with this requirement.  Employers can determine how much “nonproductive time” employees have accrued by using actual time records, or by calculating reasonable estimates of time for each employee or for particular groupings of employees.  An employer who makes errors calculating the amount of nonproductive work time will not be subject to onerous civil penalties as long as it makes good faith efforts to calculate nonproductive time and otherwise complies with this law, and pays employees at least minimum wage for all hours worked and all applicable overtime wages.  However, the employer will still have to pay the balance of wages owed for the nonproductive time it erroneously underpaid.  Since this statute is untested, we expect that litigation in this area will involve what constitutes “nonproductive time” and whether or not the employers’ “reasonable estimates” of nonproductive time are accurate.

Employers are required by this new law to include certain new information on piece rate workers’ paycheck stubs.  These employees’ wage statements must show, in separate line items, for the pay period: (1) the total hours of compensable rest and recovery periods, the rate of compensation for those periods, and the gross wages paid for those periods, and (2) the total hours of other nonproductive time, the rate of compensation for that time, and gross wages for that time.

The law also provides an affirmative defense to employers against lawsuits seeking to recover unpaid wages and other penalties on behalf of piece rate workers for rest/recovery periods and other nonproductive time.  To take advantage of this affirmative defense, the employer must, by December 15, 2016, pay owed wages for rest/recovery periods and nonproductive time, with interest, for the time period from July 1, 2012 to December 31, 2015, using methods specified in the new law.  Prior to making the payments, the employer must notify the California Labor Commissioner of its election to make the payments.  The new law contains exceptions and additional technical requirements, including reporting requirements to the employees, in order to take advantage of this safe harbor.  Therefore, employers must consult with employment counsel to guide them through this process.  The employer must, of course, also make the changes required by the statute to avoid liability going forward.

Employers with piece rate employees must take steps now to update their payroll systems and their practices to comply with the law by year’s end.  Employers who believe they might have significant past unpaid wages for the types of down time covered by the law should consult an attorney to consider the safe harbor provision.  If you have any questions about the new law and how it may affect your business, please contact our office.