California’s New Piece-Rate Compensation Requirements and a New Affirmative Defense Take Effect January 1, 2016

On October 10, 2015, California Governor Jerry Brown signed Assembly Bill 1513, which added new requirements with regard to employees who work on a piece-rate basis. The new law, which amends California Labor Code section 226.2, changes the way employers are required to pay employees paid on a piece-rate basis. The new section 226.2 goes into effect on January 1, 2016.

New Compensation Requirements

Piece rate and commission-paid employees must receive at least the minimum wage. Piece rate employees must also be paid at least the minimum wage for all time spent on tasks not specifically included in the piece rate.

Under the new law, employers are required to compensate employees who are paid on a piece-rate basis for rest and recovery periods and other nonproductive time separate from any piece-rate compensation. The law defines “other nonproductive time” as “time under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis.”

Compensation for rest and recovery periods. The law will require employers to compensate piece-rate employees separately for rest and recovery periods at a regular hourly rate that is no less than the higher of:

• “An average hourly rate determined by dividing the total compensation for the workweek, exclusive of compensation for rest and recovery periods and any premium compensation for overtime, by the total hours worked during the workweek, exclusive of rest and recovery periods”
• The applicable minimum wage rate (defined as “the highest of the federal, state, or local minimum wage that is applicable to the employment”).

Compensation for other nonproductive time. Employers must pay employees for “other nonproductive time” at an hourly rate that is not less than the applicable minimum wage. Employers may determine the amount of an employee’s other nonproductive time either through actual records or the employer’s reasonable estimates for each pay period.

With regard to the timing of payment, the new law requires employers that pay employees on a semimonthly basis to compensate employees “at least at the applicable minimum wage rate for the rest and recovery periods together with other wages for the payroll period during which the rest and recovery periods occurred.” Any additional compensation required for piece-rate employees whose rest and recovery periods are paid at an average hourly rate “is payable no later than the payday for the next regular payroll period.” 

Itemized Statements

The new law amends California Labor Code section 226.2 to require employers to:

• provide employees who are compensated on a piece-rate basis with itemized statements (as required under section 226(a)) separately stating
  • the total hours of compensable rest and recovery periods,
  • the employees’ rate of compensation, and
  • the employees’ gross wages paid for those periods during the pay period; and

• provide employees who are compensated on a piece-rate basis with itemized statements (as required under section 226(a)) separately stating
  • the total hours of other nonproductive time, as specified,
  • the employees’ rate of compensation, and
  • the employees’ gross wages paid for that time during the pay period.

(Emphasis added.)

Compliance Timeline

Employers that pay employees for rest and recovery periods at the applicable minimum wage rate have until April 30, 2016, to program their payroll systems to perform and record the average hourly rate calculation, and to comply with the itemized statement requirements, as long as they (1) pay piece rate employees for all rest and recovery periods at or above the applicable minimum wage from January 1, 2016, to April 30, 2016, inclusive, and (2) pay the difference between the amounts paid and the amounts that would be owed under the average hourly rate calculation, together with interest, by no later than April 30, 2016.

Employers’ Affirmative Defense

Until January 1, 2021, the law gives employers an affirmative defense to any claim or cause of action for failing to timely pay employees for rest and recovery periods and other nonproductive time for time periods prior to and including December 31, 2015, if the employer complies by no later than December 15, 2016.

To qualify for this affirmative defense, employers must fulfill a number of obligations as set forth in the new law. These include the following:

1. Employers must make payments to each of their employees for previously uncompensated or undercompensated rest and recovery periods and other nonproductive time from July 1, 2012, to December 31, 2015, inclusive, using one of two methods.
   1. According to the first method, the employer determines and pays the actual sums due together with the accrued interest.
   2. According to the second method, the “employer pays each employee an amount equal to 4 percent of that employee’s gross earnings in pay periods in which any work was performed on a piece-rate basis from July 1, 2012, to December 31, 2015, inclusive, less amounts already paid to that employee, separate from piece-rate compensation, for rest and recovery periods and other nonproductive time during the same time.” Employers may reduce the payment to each employee for amounts the employer already paid for rest and recovery periods and other nonproductive time as long as the reduction for other nonproductive time does not exceed 1 percent of the employee’s gross earnings during the same time.
2. The employer is not required to pay employees for any part of the July 1, 2012, to December 31, 2015, time period if, prior to August 1, 2015, an employee entered into a valid release of claims for compensation for rest and recovery periods and other nonproductive time or if a release of claim was executed in connection with a settlement agreement filed with a court prior to October 1, 2015, and later approved by a court.
3. By no later than July 1, 2016, employers must provide written notice to the Department of Industrial Relations of their election to make payments to current and former employees in accordance with the new law. AB 1513 requires the notice to include the legal name and address of the employer and to be mailed or delivered to the Director of Industrial Relations. The law also specifies that the director may provide for an email address to receive notices electronically. In addition, the Department of Industrial Relations will publish a list of employers that have provided the required notice or copies of employers’ notices on its website until March 31, 2017.
4. Employers must calculate and begin making payments to employees as soon as reasonably feasible after providing notice to the Department of Industrial Relations. Employers must complete the payments by no later than December 15, 2016. Employers that are unable to locate an employee to which wages are due may make their payments to the Labor Commissioner. Note that employers that make payments to the Labor Commissioner must pay an additional administrative fee into the Labor Enforcement and Compliance Fund.
5. Employers must provide each employee receiving a payment with an accurate statement accompanying the payment. The statement must include the following information:
   1. a statement that the payment has been made pursuant to the affirmative defense;
   2. a statement as to which formula was used to determine the payment; and
      1. Employers using the first method must also include “a statement, spreadsheet, listing, or similar document that states, for each pay period for which compensation was included in the payment, the total hours of rest and recovery periods and other nonproductive time of the employee, the rates of compensation for that time, and the gross wages paid for that time.”
      2. Employers using the second method, must include “a statement, spreadsheet, listing, or similar document that shows, for each pay period during which the employee had earnings during the period from July 1, 2012, through December 31, 2015, inclusive, the gross wages of the employee and any amounts already paid to the employee, separate from piece-rate compensation, for rest and recovery periods and other nonproductive time.”
   3. the calculations that the employer used to determine the total payment made.

Employers do not lose the affirmative defense for making a “good faith error” in payments if the employer makes the payment with interest “within 30 days of discovery or notice of the error.”

Key Takeaways

According to Douglas J. Farmer, a shareholder in the San Francisco office of Ogletree Deakins, “AB 1513 effectively bans the use of piece-rate pay as many California employers have come to know it. Unlike federal law and the laws of many states, which permit employers to average piece-rate hours with other uncompensated hours to satisfy minimum wage pay requirements, AB 1513 bans averaging. Now any employer paying solely on a piece rate must also pay for all ‘other nonproductive time’ in the workday by using hourly or other pay to compensate all remaining non-piece rate hours worked. Special formulas must now also be used to compensate for unpaid rest breaks. Employers in the transportation, construction, and agricultural industries now using piece rates are likely to be the hardest hit and may wish to consult California employment counsel to determine their compliance options, including invoking the bill’s safe harbor provisions.”