California Court of Appeals Finds "Hourly" Compensation Plan Not Subject to Piece Rate Laws

California's Fourth Appellate District, Division One (San Diego/Riverside), recently upheld a "production" payment plan that guarantees at least the minimum wage for all hours worked (including non-productive time and rest breaks) but provides that automotive technicians can be paid a higher "hourly rate" based on their production, very similar to the now common "Hourly plus Production Bonus" pay plans. In other words, the payment plan paid by the hour, but the hourly rate to be paid each pay period varied based directly on the individual employee's production. Very similar to an hourly plus production bonus plan, but where the effective bonus was divided by the hours worked and paid on an "hourly" basis.

In the "Certified Tire and Service Centers Wage and Hour Cases," Certified Tire and Service Centers ("Certified Tire") faced multiple coordinated wage and hour class action lawsuits brought by many of its tire technicians who diagnosed and repaired customer vehicles, alleging that their employers payment plan, which they called a Technician Compensation Program ("TCP"), did not comply with "applicable minimum wage and rest period requirements" in violation of California law.

Interestingly, although the payment plan was clearly based on each individual employee's production, the court found that the much talked about Gonzalez and Bluford appellate court cases and, by implication, Labor Code section 226.2 which codified the holdings of Gonzalez and Bluford did not apply to this "hourly rate" payment plan. Even more interesting was the courts avoidance of any direct discussion of Labor Code section 226.2. It is only mentioned one time in the entire opinion.

Lastly, with little discussion, the court stated, "[t]echnicians take rest breaks as required by law, and they do not clock out while doing so." As such, one can assume that Certified Tire paid for each employee's rest breaks at either the minimum wage rate or at the adjusted "base hourly rate". Although not discussed in the opinion, one could assume that the rest breaks were therefor paid at an hourly rate similar to the "average rate of pay" under Labor Code 226.2.

Technician Compensation Plan

Technicians were paid a guaranteed minimum hourly rate for all hours worked, which included non-productive time and rest breaks. On top of this base hourly rate, the TCP gave the technicians the possibility of earning a higher "hourly wage" for hours worked during a given pay period based on each employee's production. This higher hourly wage would be rewarded to those technicians who did repair work that was billed to customers as a separate labor charge, known as "production dollars." As such an employee's hourly wage rate would vary from pay period to pay period.

In order to calculate the increased hourly rate, the technician's total production dollars for the pay period would be multiplied by 95%. This number would then be multiplied by a fixed "tech rate" based on the employee's experience and other qualifications. Last, the resulting number would be divided by the total hours worked during the pay period, resulting in an hourly rate for that pay period. The higher of the technicians guaranteed minimum hourly rate and the calculated "base hourly rate" would be used for each pay period. Overtime hours were paid at one and one-half the hourly rate that applies during the subject pay period.

Court Rules that the Hourly payment plan was not an "activity based compensation plan."

The technicians argued that the TCP pay scheme was similar to piece-rate pay (governed by Labor Code section 226.2) in that they were only being paid for those jobs that constituted "production dollars," or work that was billed to customers as a separate labor charge. Further, they argued that they were not being compensated separately for rest breaks. The technicians' alleged claimed violations of California law were not well taken by the court.

The court distinguished this case from various other piece-rate cases by analyzing why they believed TCP is not a piece-rate or other activity-based compensation plan.

While TCP has similarities to piece-rate and other activity-based compensation systems, the court noted that "it is an hourly-rate system in which technicians are paid at a single hourly rate for all hours worked during a pay period." Technicians are compensated for each and every hour they work, regardless of whether those hours be waiting time, productive/non-productive time, or unbilled labor charges. Thus, although a technician's hourly rate may vary from paycheck to paycheck due to production dollars, the technicians are always compensated for every hour worked at a rate above the applicable minimum wage.

The key point the court made was that "because technicians are paid at an hourly rate that is above minimum wage for each hour on the clock, this case does not involve averaging of an employee's hourly rate to show compliance with minimum wage requirements." Instead, the employer Certified Tire satisfied minimum wage and rest period requirements by simply "paying technicians at a rate above the minimum wage hourly rate for all hours on the clock."

Summary

Certified Tire's TCP may have its similarities to piece-rate and other activity-based compensation plans. Despite the similarities, the court in Certified Tire found that tire technicians are compensated at a rate above the minimum wage for all hours on the clock, including rest periods. As a result, Certified Tire was found not to be in violation of the law, as the court stated that this plan was not an "activity-based compensation system as plaintiff's contend" and therefore "Armenta, Gonzalez, Bluford and Vaquero are not applicable...."

Piece Rate and Hourly plus Production Bonus employers should be well aware of this decision and review their current plan with their attorney to determine whether it might make sense to change to an "hourly" plan similar to the one used by Certified Tire and/or to ensure that their current Piece Rate or Hourly plus Production Bonus plan is compliant with Labor Code 226.2. It is our opinion that the Certified Tire decision will likely be appealed to the California Supreme Court. We will keep you posted.

For a complete copy of this case, please click the link below:

Certified Tire and Service Centers Wage and Hour Cases

Kyle D. Kring is a Partner of Kring & Chung, LLP. He can be reached at (949) 261-7700 or via email at kkring@kringandchung.com. Tyler Kring is a law clerk of Kring & Chung, LLP. He can be reached at tkring@kringandchung.com.

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