Some organizations pay employees by the piece rate, that is, based on certain tasks completed rather than based on the number of hours worked. Piece rate compensation is particularly common in the automotive repair industry. In Gonzalez v. Downtown LA Motors, LP, the California Court of Appeal decided that auto technicians paid a piece rate for work performed must be paid by the hour for all time spent on tasks not specifically included in the piece rate (referred to by the court as “waiting time”).

The Facts

Like many automotive repair shops and dealerships in California, Downtown LA Motors, LP (“DTLA”), a Mercedes Benz dealership, compensated its service technicians on a piece rate basis for each repair they completed. Under DTLA’s system, technicians were paid a flat hourly rate ranging from $17 to $32 depending on the technician’s experience for each “flag hour” worked. DTLA assigned “flag hours” to every task a technician performed on a vehicle. The “flag hours” were intended to correspond to the actual amount of time a technician would take to complete the task. If the technician completed the task in less time than DTLA determined it should take, the technician still earned the full “flag hour” for that activity. Employees only earned “flag hours” when working on a vehicle repair and not for any other work.

DTLA scheduled technicians to work 8-hour shifts. During their shifts, technicians performed tasks on vehicles, and completed non-repair tasks while waiting for repair work to come in. During these “waiting” periods, technicians could not leave the premises, and they did not earn any “flag time.”

DTLA recorded each technician’s actual working time, including “waiting” time. Then, based on the technician’s actual hours worked, DTLA calculated how much each technician would have earned at the end of each pay period if the technician had been paid the state’s minimum wage for each hour worked (the “minimum wage floor”). If a technician’s total piece rate compensation for the pay period fell below the applicable minimum wage floor for all hours worked, DTLA paid the difference to the technician. DTLA believed this process ensured the technicians were paid at least minimum wage for all hours worked.

The Class Action

Oscar Gonzalez filed suit on behalf of himself and 108 technicians who worked for DTLA between 2002 and 2008 seeking compensation for the time they spent competing tasks not included in the “flag hours.” Gonzalez argued by only paying for “flag hours” and not “waiting” time, DTLA violated California law.

After a bench trial, the court entered judgment for Gonzalez and the other class members. DTLA appealed.

The Court of Appeal’s Decision

California’s minimum wage requirements are set forth in the Industrial Welfare Commission’s (“IWC”) Wage Orders. Although the IWC was defunded in 2004, its wage orders remain in effect. Wage Order No. 4 states: “Every employer shall pay to each employee, on the established pay day for the period involved, not less than the applicable minimum wage for all hours worked in the payroll period, whether the remuneration is measured by time, piece, commission, or otherwise.” “Hours worked” is defined in subdivision 2(k) of the wage order as “the time during which an employee is subject to the control of an employer and includes all the time employee is suffered or permitted work, whether or not required to do so.”

DTLA argued that its compensation program complied with Wage Order No. 4 because the technicians were paid an amount “not less than” the amount they would have earned had they been paid the minimum wage for “all hours worked” (including “waiting” time) during a given pay period. If a technician’s “flag hours” were not sufficient to cover the “minimum wage floor,” DTLA would pay the technician additional wages to reach the floor.

The technicians argued that the plain meaning of the term “all hours worked” in Wage Order No. 4 is “each and every hour” worked. Therefore, the technicians should have been separately compensated at the minimum wage for “each and every hour” of “waiting” time.

The Court of Appeal agreed with the technicians’ arguments, relying on a 2002 opinion letter from California’s Division of Labor Standards Enforcement (“DLSE”), the California agency responsible for enforcing the state’s wage-hour laws. In that letter, the DLSE ruled that California law requires payment of the minimum wage to “for all hours worked.” Therefore, the Court concluded that DTLA violated California law because the technicians were each owed minimum wage for all “waiting” time,” in addition to the piece rate pay.

Tips for Employers

Employers should keep a few principles in mind when evaluating whether to pay employees on a piece rate basis. First, non-exempt employees (i.e., employees subject to overtime, rest break and meal period, and timekeeping rules) must record all hours worked, even if they are paid a piece rate. In addition, non-exempt employees must be paid at least minimum wage ($8.00/hour) for all work not related to the piece rate. This includes periods during which piece rate work in not available, or when performing tasks ancillary to the piece rate, such a stocking, cleaning equipment, completing paperwork, and the like. Finally, when determining what tasks to include in the piece rate, employers should not include those only tangentially related to the piece rate (e.g., cleaning the shop and stocking the shelves should not be considered part of a piece rate repair task).