California Governor Signs AB 1513, Severely Limiting Piece-Rate Compensation But Throwing A Liability Life Raft To Employers

On October 10, 2015, 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. Many such employers have been battling minimum wage and other class-action claims in recent years based on the Gonzales and Bluford, cases and a number of federal district court cases following and expanding on those holdings.

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.

Gonzalez, Bluford, and the Redefining of Piece-Rate Compensation in California

Many industries in California, and throughout the country, have traditionally and overwhelmingly utilized piece-rate plans to compensate employees and incentivize productivity. Over the last several years, employers using piece-rate compensation have found themselves increasingly battling claims by class-action plaintiffs that such piece-rate pay plans violate California's minimum wage law. This litigation directly challenged the application in California of the long standing interpretation of the federal wage and hour law that only compared the total compensation for a workweek to the total hours worked in that week, regardless of how the total compensation was calculated or the activities for which that compensation was paid.

Under this standard provided by federal minimum wage law, an employer is compliant with its minimum wage obligation if the total compensation for a workweek, when divided by the total number of hours worked in the workweek yielded an "average" hourly wage equal to or above minimum wage. However, in Armenta v. Osmose, Inc., 135 Cal. App. 4th 314 (2d App. Dist. Dec. 29, 2005), a California appellate court held that the "averaging" permitted by federal law violates California law. Osmose paid its employees by the hour at a rate that was well in excess of the minimum wage, but did not pay the employees for every fractional hour that they worked. California law was construed to require the payment of the minimum wage for each hour or fractional hour worked regardless of how...