Do You Pay a Piece Rate or for Flagged Hours? Employer Beware!

On April 2, 2013 the California Court of Appeal published its decision in Gonzalez v. Downtown LA Motors, LP, 2013WL 1316514.  The decision will have a wide-reaching and substantial financial effect on automobile repair facilities that pay employees on a flagged hour basis.  This decision will have an equal impact on any employer who pays its employees on a piece-rate basis.  We are apprising you of the court’s decision so that you can take steps to modify pay practices, if necessary.  We encourage you to seek legal advice as you make the change. 

Downtown LA Motors paid its employees like many in the automobile repair business, on a piece-rate system, using the flagged hour basis.  Technicians were paid a flat rate for each flagged hour (s)he accrued.  Technicians accrued flagged hours only when working on a repair. 

Downtown LA Motors also kept track of the time a technician spent in the workplace, whether or not working on a repair.  At the end of a pay period, the company calculated how much a technician would earn if paid an amount equal to total hours on the clock multiplied by the minimum wage.  If the technician’s compensation fell below this minimum wage floor, the company supplemented the pay to meet minimum wage. 

Technicians filed a class-action lawsuit contending that the company failed to pay technicians a minimum wage during the time they were waiting for customers or performing non-repair work.  They claimed that the company should have paid the flagged hour rate for time spent performing repairs, and then paid additional compensation at minimum wage for all other non-repair hours.  Those employees who no longer worked for the company also sought waiting period penalties under Labor Code section 203. 

The outcome of the case hinged on the meaning of section 4(B) of the wage order.  This provision reads:  Every employer shall pay to each employee, on the established payday 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. 

The Division of Labor Standards Enforcement (DLSE) contends that per this provision, the obligation imposed an employer “to pay minimum wages attaches to each and every separate hour.”  (Armenta v. Osmose, Inc. (2005) 135 Cal.App.4^th 314; DLSE Op. Ltr. 2002.01.29.)  In contrast, the federal government interprets the obligation to pay minimum wage to extend to the total number of hours worked, and not to each hour separately. 

To illustrate its point, the court provided an example.  If a technician works four flagged hours at $20 per hour and then leaves, (s)e earned $80 during the 4-hour period.  However, if a second technician works four flagged hours at $20 per hour but is required to remain in the workplace and perform non-repair work or wait until his/her 8-hour shift ends, (s)he earns the effective rate of $10 per hour

Under the Gonzalez case, the second technician is entitled to four hours at minimum wage in addition to the $80.  If his/her employment terminated before you paid the additional $8 per hour for non-repair work, you would be required to pay a penalty for late payment of wages. 

If your business pays employees a piece rate but not an additional wage for other work, you should seek legal counsel to determine how to correct the company’s pay practices.  This pay practice could result in substantial liability to the company.