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Court of Appeal Decision Paves Way for Compliance Through Variable Hourly Rate Pay

by | Jul 20, 2021 | Publications |

By: Kyle D. Kring and Kerri N. Polizzi

In a long-awaited decision, a California Court of Appeals has upheld a trial court judgment in favor of Certified Tire and Service Centers, Inc. (“Certified Tire”), finding the company’s hourly rate compensation system for its technicians – based on a plan that allowed for the hourly rate to fluctuate each pay period based on an employee’s production – was compliant with California’s wage and hour laws.  Kring & Chung, LLP submitted an Amicus Brief in the case on behalf of Housing Contractors of California (formerly the California Professional Association of Specialty Contractors) (“HCC”), bringing the Court’s attention to the broad impact this decision would have on its members and requesting clarification of certain issues raised in the initial opinion.

Procedural Background:

Certified Tire sold tires and performed automotive repairs through its 40 stores in California. Plaintiffs were technicians (mechanics) at Certified Tire stores and were compensated pursuant to a written Technician Compensation Program (TCP).

The plaintiffs contend that Certified Tire violated the applicable minimum wage and rest period requirements by implementing a compensation program that guaranteed its automotive technicians a specific hourly wage above the minimum wage for all hours worked during each pay period, but also gave them the possibility of earning a higher hourly wage for all hours worked during each pay period based on certain productivity measures. Specifically, the technicians argued that they should have received separate pay for rest periods and non-productive time under this plan.

This decision was made is an opinion by the California Court of Appeal, 4th Appellate District, Division One[1] in the appeal of a consolidated wage and hour class action (based on multiple wage and hour class action lawsuits filed in Riverside and San Diego Counties), following a judgment after a bench trial in favor of defendants Certified Tire and Barrett Business Services, Inc.

The Court of Appeal previously issued an opinion on September 18, 2018, in which the court affirmed the judgment of the trial court. (Certified Tire & Service Centers Wage & Hour Cases (2018) 28 Cal.App.5th 1) (review granted Jan. 16, 2019, S252517).

Next, in January 2019, the California Supreme Court granted review, deferring consideration and disposition of the case until after it decided a related issue in Oman v. Delta Air Lines, Inc. (2020) 9 Cal.5th 762 (“Oman”).  The issue relevant in Oman was whether California law, specifically Labor Code sections 221, 222, and 223, prohibits borrowing compensation contractually owed for one set of hours or tasks to rectify compensation below the minimum wage for a second set of hours or tasks, regardless of whether the average of paid and unpaid (or underpaid) time exceeds the minimum wage. The California Supreme Court held that California’s limits on “wage borrowing” permit compensation schemes that promise to compensate all hours worked at a level that is at or above the minimum wage, even if particular components of those schemes fail to attribute to each and every compensable hour a specific amount equal to or greater than the minimum wage.

In September 2020, the California Supreme Court transferred Certified Tire back to the Court of Appeal with directions to vacate the September 18, 2018 opinion and to reconsider the technician’s appeal in light of Oman.

The parties in Certified Tire submitted supplemental briefing regarding Oman and any other matter arising after the appellate court’s original decision, and the Court of Appeal held oral argument.

HCC submitted an amicus brief drawing the Court’s attention to the broad impact this decision would have on members and requesting clarification of certain issues raised in the initial opinion.

After considering the parties’ and HCC’s briefing on the applicability of Oman to the issues presented in this matter, the Court of Appeal concluded that that Plaintiffs’ appeal lacked merit, and the Court affirmed the trial court judgment in favor of the employer.

Basic Overview of Minimum Wage and Overtime Requirements

In Armenta, a California Court of Appeal ruled that employers cannot average pay for productive activity to include unpaid non-productive hours worked in meeting their minimum wage obligations. That decision spawned further court decisions holding that, under California law, piece-rate compensation similarly could not be averaged with “nonproductive” time spent on non-piece work, such as waiting time between jobs or time spent on rest periods, to meet minimum wage obligations. See e.g. Gonzalez v. Downtown LA Motors (2013) 215 Cal. App. 4th 36 (holding that employer had to pay a separate hourly rate of at least minimum wage during work time when piece-rate employees are engaged in compensable activity that does not directly produce piece-rates); Bluford v. Safeway Stores, Inc. (2013) 216 Cal. App. 4th 864 (invalidating piece rate compensation system that did not pay an hourly rate for rest breaks); Vaquero v. Stoneledge Furniture LLC (2017) 9 Cal. App. 5th 98 (invalidating commission-based compensation system that did not pay a separate hourly rate for rest breaks).

These decisions ultimately resulted in the passage of AB 1513, which took effect on January 1, 2016. AB 1513, which was codified in Labor Code section 226.2, provides specific guidelines for paying piece-rate employees for (1) productive work, (2) non-productive work, and (3) rest periods. In general terms, Labor Code section 226.2 established compensation and wage statement requirements for piece-rate employees. Specifically, under this Section, employees paid on a piece-rate basis must be paid separately for their rest periods and “other nonproductive time” (vaguely defined 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.”)

The Section also established that rate of compensation for rest and recovery periods must be no less than the higher of: (1) the 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, or (2) the applicable minimum wage.

Labor Code 226.2 states in its opening sentence “[t]his section shall apply for employees who are compensated on a piece-rate basis for any work performed during a pay period.” (Emphasis added). Importantly, however, section 226.2 does not define “piece-rate” compensation, nor does any other provision of the Labor Code.

Overview of the Technician Compensation Program (TCP) at Issue

As noted above, in the case at issue, technicians at Certified Tire stores were compensated pursuant to a written Technician Compensation Program (TCP). The TCP provided generally as follows:

  • Technicians were paid an hourly wage for all work performed (including rest breaks and non-productive time), but the hourly rate would vary from pay period to pay period.
  • The hourly rate was guaranteed to be at least an agreed-upon minimum hourly rate, which exceeded the legal minimum wage and which was assigned to the technician at the time of hire (“guaranteed minimum hourly rate”).
  • The hourly rate each technician earned during each pay period could exceed their guaranteed minimum hourly rate based on a production formula as set forth in the TCP, but could never fall below it (see below).
  • Overtime hours were paid at 1.5 times the hourly rate that applied during the pay period (i.e., the greater of the base hourly rate or the guaranteed minimum hourly rate).

Per the TCP formula, each billed dollar of labor charged to a customer by Certified Tire as a result of the technician’s work during the pay period was referred to as the technician’s “production dollars.” Certified Tire multiplied the technician’s production dollars by 95 percent, multiplying that amount by a fixed “tech rate” assigned to the technician depending on experience and qualifications, and then dividing by the total hours worked by the technician during the pay period to arrive at an hourly rate (“base hourly rate”).  If the base hourly rate exceeded the guaranteed minimum hourly rate, the employee would be paid the base hourly rate for every hour worked during that pay period. If it did not, the employee would be paid the guaranteed minimum hourly rate for the same number of hours.

Certified Tire’s Holding:

The court summarized its holding on page 16 of its Opinion as follows:

In short, Oman clarifies that an employer upholds its legal obligation to pay the minimum wage for each hour worked when it pays its employees according to its contractual promise, and it pays at least the statutory minimum wage for each hour worked. Impermissible wage borrowing occurs only when an employer takes away some of an employee’s contractually promised compensation to cover periods or tasks that are required of the employee but are not compensated at all or are compensated at a rate below the minimum wage. (Emphasis Added.)

What Does Certified Tire Stand For?:

The Certified Tire opinion clarifies that it is permissible for an employer to develop and utilize an hourly rate compensation plan with a base hourly rate in excess of the minimum wage, where the employee is paid for all hours worked (including rest breaks and non-productive time), and where the employee may earn a higher hourly rate for all hours worked based on a productivity-based formula.

What Certified Tire Does Not Stand For?:

Certified Tire does not directly address the issue of the applicability of Labor Code section 226.2 to a traditional Hourly Plus Production Bonus compensation system. Certified Tire’s TCP was a pure hourly compensation plan with no true production bonus (i.e., an incentive amount paid on top of an agreed upon flat hourly rate). Instead, in Certified Tire, the hourly rate itself was subject to fluctuation based on productivity as set forth in the TCP.

Consider Revising your Production/Incentive-based Compensation Plans

If your company is currently using a Piece or Hourly Plus compensation plan, or other incentive pay system, you may want to consider an hourly pay plan where the hourly rate is able to fluctuate each pay period based on production. Such a plan could have significant benefits from a legal compliance, ease of compliance, administrative burden, and financial standpoint.

Kring & Chung, LLP’s employment team can assist you in analyzing whether a Certified Tire-based payment plan might be beneficial to your company and consistent with your hiring and production goals, and with drafting an hourly payment plan consistent with the criteria established in Certified Tire, with a variable hourly rate of pay based on production. In addition, we can assist in ensuring that all of your employment documents (Employee Handbook, Notice to Employee, time card, pay stub, etc.) are consistent with your compensation plan. These documents are not “one size fits all.” They are only effective legal protections if they are up to date and consistent with your actual pay policies.

We can also assist in training your staff on implementing a new policy to ensure you have a means of tracking all hours worked. The Certified Tire opinion made very clear that it was not an “off the clock” case because the employer accurately captured all time worked.

Please give us a call if we can be of assistance Kyle D. Kring is the Founding Partner of Kring & Chung, LLP and Kerri N. Polizzi is a senior associate specializing exclusively in employment law. They can be reached at (949) 261-7700 or [email protected] and [email protected]

[1] This Division is located in San Diego, California, and hears appeals from Imperial and San Diego Counties.

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