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California Court of Appeal Upholds Hourly Rate Based on “Greater of” Guaranteed Minimum or Productivity Formula

by D. Gregory Valenza | | October 6, 2018

Certified Tire put in place, per the Court. 

a compensation program, which 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.

In essence, employees would earn the greater of (1) a minimum hourly rate for all hours worked or (2) a higher hourly rate, based on a formula taking into account productivity.  How did the company calculate the alternative hourly rate?

Under the formula, each billed dollar of labor charged to a customer as a result of the technician’s work during the pay period is referred to as the technician’s “production dollars.”2 Certified Tire applies the formula by multiplying 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,3 and then dividing by the total hours worked by the technician during the pay period. By applying this formula, Certified Tire determines the technician’s “base hourly rate” for the pay period. If the base hourly rate exceeds the technician’s guaranteed minimum hourly rate, the technician is paid the base hourly rate for all time worked during the pay period. If the guaranteed minimum hourly rate is higher than the base hourly rate, the technician is paid the guaranteed minimum hourly rate for all time worked during the pay period.


For example, a technician with a “tech rate” of 30 percent who generated $5,000 of production dollars in an 80-hour pay period, would achieve a base hourly rate for that pay period of $17.81 (based on $5,000 multiplied by .95, multiplied by .30, divided by 80). Assuming that base hourly rate is higher than the technician’s guaranteed minimum hourly rate, the technician would be paid $17.81 multiplied by 80 hours for the pay period, for a total payment of $1,424.80.  

Sounds legal, right/?  Employees always earned at least minimum wage for all hours worked, and they could earn more if their productivity justified it. 

But Certified Tire’s paying employees the greater of the minimum rate or the formula-derived rate apparently caused some upset.  Not every activity would generate productivity dollars under their formula. So, some people earned the minimum rate for more hours than others.  A group of employees filed class action lawsuits. The trial court certified two classes of note:

(1) “All Technicians employed by Defendant from March 6, 2009, to the present to whom Defendant failed to pay a separate minimum wage for non-productive time;” and

(2) “All Technicians employed by Defendant from March 6, 2009, to the present to whom Defendant failed to pay for off duty rest periods.” 

The plaintiff believed that the formula was akin to paying a “secret lower wage” because of the way that the formula rewarded only time worked that generated revenue.  The trial court disagreed and found in favor of the employer. And the employees appealed.

On appeal the employees’ argument was this:

plaintiffs rely on Armenta, Gonzalez, Bluford and Vaquero for the principle that “an employer utilizing an activity-based compensation scheme . . . must separately compensate employees for both: (1) time working on tasks which generate no wages; and (2) rest breaks.” Plaintiffs contend that the TCP violates these principles because, according to them, technicians earn “no wages” when performing work that does not generate production dollars, and therefore “the TCP violates the minimum wage requirements by failing to provide the required separate compensation” for each hour worked. 

The decisions cited in the plaintiffs’ argument above say that an employer cannot average high pay like a piece rate, or commission, over the hours worked to prove that  that the employer is paying an “average” of at least minimum wage. That is, if an employer pays high commissions or a high piece rate, it’s can’t rely on that pay to compensate the employees for non-selling time, non-productive time like meetings, or rest periods.

But in this case, the employer pays at least minimum wage for each hour actually worked, and pays for rest time at (at least) minimum wage. The plaintiffs missed the point in that Certified Tired paid at least minimum wage for all hours that the employees were clocked in for, including rest period time. Yes, the rate of pay the employee earned could change depending on the employee’s productivity. But even that rate was applied to all hours worked, productive or not, rest period or not.

As the Court put it:

Certified Tire applies an hourly based system that compensates technicians for all the time that they are at work. Technicians earn wages for every single work activity that they perform, including waiting for customers and performing tasks that do not have billed labor costs associated with them. Although the hourly rate differs from pay period to pay period because technicians have the opportunity to increase their guaranteed minimum hourly rate based on the generation of production dollars, the technicians are always paid on an hourly basis for all hours worked at a rate above minimum wage regardless of their productivity, and regardless of the type of activity in which they were engaged during those hours. 


[C]ontrary to plaintiffs’ contention, 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. In Armenta and Gonzalez, the employers unsuccessfully argued that they should be able to divide the amount they paid their employees by the total hours worked to establish they had complied with minimum wage requirements for that pay period. (Armenta, supra, 135 Cal.App.4th at pp. 321-322; Gonzalez, supra, 215 Cal.App.4th at pp. 41-42.) Here, Certified Tire does not need to show compliance with minimum wage requirements by dividing the total amount paid during a pay period by the total hours worked. Instead, Certified Tire directly establishes compliance with minimum wage requirements by paying technicians at a rate above the minimum wage hourly rate for all hours on the clock. 

The key to compliance is to ensure that non-exempt employees are paid a straight hourly rate of at least minimum wage for all clocked in hours.  That is what the law requires.  Employers that pay piece rates have to comply with additional  wage statement requirements, and compensation for rest periods at the “regular rate.”  But an employer’s deciding what hourly rate to pay for all hours worked, depending on the employee’s performance / productivity, remains within the employer’s discretion.  At least for now.

This case is Certified Tire and Service Centers Wage and Hour Cases, and the opinion is here

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