Beginning on January 1, 2016, a new California law (AB 1513) affects how employers must pay “piece-rate” workers (those employees paid for completing a particular task or making a particular piece of goods). Piece-rate compensation is common in certain industries to incentivize workers to complete tasks efficiently, such as automobile mechanics or agricultural workers. However, following the passage of AB 1513, paying piece-rate workers is more complicated.

Piece-Rate Court Decisions

AB 1513 follows a series of cases evaluating whether piece-rate workers must be separately compensated for rest periods and “nonproductive” time—time they are required to remain at work, but which does not directly contribute to the piece-rate task. For example, in Gonzales v. Downtown LA Motors, the employer paid a piece-rate to automobile mechanics for performing vehicle repairs, but did not separately compensate them for the “nonproductive” time such as attending meetings and restocking parts. Even though the employees’ total compensation averaged out to greater than the minimum wage, the Second District Court of Appeal held that the employees had to be separately compensated for the nonproductive time. Similarly, following the Gonzales case, the Third District Court of Appeal held in Bluford v. Safeway, Inc. that piece-rate truck drivers had to be separately compensated for their rest periods.

AB 1513 Requirements

In passing AB 1513, the California legislature codified these and related principles and created California Labor Code section 226.2. Section 226.2 requires piece-rate workers to be compensated for rest and recovery periods and other nonproductive time, separate from the piece rate. “Rest and recovery periods” must be paid at the higher of an average hourly rate determined by dividing total compensation for the workweek (not counting compensation for rest and recovery periods or the overtime premium) by the total hours worked, or the minimum wage (since January 1, 2016, $10 per hour in California, but higher under some local ordinances). Piece-rate workers must be paid for nonproductive time at no less than minimum wage. However, the law does not define what “nonproductive time” means.

Each piece-rate worker’s itemized wage statement must reflect the total hours of compensable rest and recovery periods and nonproductive time, the rates of compensation, and the employee’s gross wages for the pay period.

AB 1513’s “Safe Harbor”

Additionally, AB 1513 includes a “safe harbor” provision that allows employers a limited affirmative defense to piece-rate claims until December 15, 2016. Even though AB 1513 is not retroactive, the affirmative defense will protect employers’ from piece-rate claims for failure to pay for rest and recovery periods or nonproductive time based on existing case law.

If an employer (1) makes payments to each of its current and former employees for the amount of break and other non-productive time not separately compensated from July 1, 2012, through December 31, 2015 (calculated according to a formula provided in the statute), (2) makes a good faith effort to locate and provide these payments to qualifying former employees, and (3) notifies the California Department of Industrial Relations (DIR) by July 1, 2016, of its intent to make the payments, the employer may raise an affirmative defense to piece-rate claims filed on or after March 1, 2014, unless judgment has already been entered and the time for appeal expired by the end of 2015.

Guidance from the DLSE

In December 2015, the California Department of Labor Standards Enforcement (DLSE), a division of the Department of Industrial Relations (DIR) responsible for administering and enforcing many of California’s wage laws, issued a “fact sheet” and “Frequently Asked Questions” about AB 1513. The guidance explains that the new law applies to anyone paid a piece-rate, even if the worker also separately receives a base wage. However, the new law does not apply to commissions, which must generally be based proportionately on sales (i.e., not services or tasks).

Additionally, the DLSE clarified that the applicable pay rate for rest and recovery periods is the “regular” rate for calculating overtime, taking into account all nondiscretionary compensation. Rest and recovery periods and other nonproductive time cannot be defined as part of the piece rate, and instead must always be considered separately. However, employers do not have to track the actual timing of rest periods (e.g., using a time clock).

Finally, the DLSE issued a “safe harbor” form for those employers who intend to take advantage of that provision, to notify the DIR as required.

Tips for Employers

Employers who currently pay piece-rate compensation must begin separately compensating for rest and recovery and nonproductive time immediately. They must also ensure their itemized wage statements meet the new requirements. Moreover, employers must ensure they clearly delineate what work is part of the piece-rate and what is separate nonproductive time, and communicate to affected employees how to accurately record their work hours to ensure they are properly compensated.

Employers may also consider prospectively restructuring compensation systems for piece-rate workers. For example, employers may choose to instead pay an hourly rate to piece-rate workers, basing the hourly rate on current total compensation (as long as it does not fall below minimum wage) to prevent the morale problems that can result from decreasing compensation. In conjunction, to ensure productivity, employers will likely want to develop well-defined, productivity-based performance expectations. In doing so, however, employers must be careful not to tie any performance incentives to the completion of a particular task, as such an incentive would likely be considered “piece-rate” compensation under the law.

Finally, employers who wish to take advantage of the safe harbor should work with counsel to assess the associated costs and risks. Employers may also wish to wait to see if the DLSE, the legislature, or the courts provide further clarification about taking advantage of the safe harbor, prior to the July 1, 2016 deadline for notifying the DIR.