If you pay your workers on a piece-rate basis, you might think you’re safe regarding the minimum wage requirements as long as their total average pay comes out to at least minimum wage. According to the California Court of Appeals, though, you’d be wrong.

Under an important new ruling, employees paid on a piece-rate basis must also be separately paid hourly pay for their waiting time. The common practice of looking back to see if the total piece-rate compensation works out to at least minimum wage and making up the difference if necessary won’t cut it anymore.

Wage and hour class action

Downtown LA Motors (DTLA) is an automobile dealership that sells and services Mercedes-Benz vehicles. Like many auto dealerships and repair shops, it compensates its service technicians on a piece-rate basis, meaning technicians are paid primarily based on repair tasks completed.

Under the DTLA system, technicians are paid a flat rate ranging from $17 to $32, depending on the technician’s experience, for each “flag hour” the technician accrues. Flag hours are assigned by Mercedes-Benz to every task performed on an automobile; the flag hours are intended to correspond to the actual amount of time a technician would need to perform the task. Technicians accrue flag hours only when working on repair orders.

Technicians must remain in the workplace during their shifts and obtain permission to leave if they aren’t working on a repair order. They accrue no flag hours while waiting for cars to repair.

During waiting time, technicians are, however, expected to perform various nonrepair tasks, like obtaining parts, cleaning workstations, attending meetings, traveling to other locations to pick up and return cars, reviewing service bulletins, and participating in online training. They accrue no flag hours for these tasks.

DTLA calculates its technicians’ pay for an 80-hour pay period by multiplying flag hours accrued during that period by the technician’s applicable flat rate. A technician with a flat rate of $26 who accrued 150 flag hours in a pay period, for example, would earn 150 x $26, or $3,900.

DTLA also tracks all time a technician spends at the worksite, regardless of whether the technician is working on a repair. At the end of each pay period, it calculates how much each technician would earn if paid an amount equal to his total recorded hours on the clock multiplied by the applicable minimum wage—what DTLA calls the “minimum wage floor.”

If a technician’s flat rate/flag hour pay falls short of the minimum wage floor, DTLA supplements the pay in the amount of the shortfall.

DTLA was sued by a class of 108 service technicians who worked for the company between April 2002 and June 2008. The technicians alleged that DTLA violated state law by not paying them a minimum wage during their waiting time, when they were on the clock waiting for repair orders or performing nonrepair tasks.

They also claimed that technicians terminated from April 2002 to June 2008 were entitled to penalties under California Labor Code Section 203(a) because DTLA did not pay them all the wages they were due at their termination.

The trial court ruled in the technicians’ favor and awarded them $1.5 million for their waiting time. It also awarded penalties of about $240,000 under Section 203(a) for the employer’s willful failure to pay all wages owed to the former technicians at the time they were terminated. DTLA appealed.

Compensation system was unlawful

California Wage Order No. 4 requires employers to pay each employee minimum wage for “all hours worked.”

The technicians contended that “all hours worked” means “each and every hour” worked, so the technicians should have been separately compensated at the applicable minimum wage for each and every hour of time spent waiting for repair work.

DTLA countered that this interpretation conflicted with the “plain language” of the wage order, which doesn’t distinguish between waiting time and productive time and doesn’t require an employee paid on a piece-rate basis to be compensated separately for waiting time.

The Court of Appeals disagreed. It found that Wage Order No. 4 doesn’t allow any variation in its application based on the manner of compensation. The fact that DTLA compensated its technicians on a piece-rate basis, it said, wasn’t a valid ground for varying either the application or the interpretation of the wage order.

The court also dismissed DTLA’s argument that the state Division of Labor Standards Enforcement’s (DLSE) policies supported its position. The DLSE Manual states that piece-rate workers must be paid at least the minimum wage for any periods of time during which their compensation is reduced because they are precluded from earning piece-rate compensation during that time as a result of the directions of the employer.

DTLA claimed the technicians weren’t idle during their waiting time as a result of its direction but because there simply weren’t repair orders available. Therefore, DTLA asserted, it wasn’t required to compensate the workers for their waiting time.

But the Court of Appeals held that the time the technicians spent performing nonrepair tasks was indeed at DTLA’s direction. The workers weren’t allowed to leave the premises while waiting for repair work but were expected to perform various nonrepair tasks, all of which were at the employer’s direction. Gonzalez v. Downtown LA Motors, LP, Calif. Court of Appeals (Dist. 2) No. B235292, (2013)

What it means for you

If you pay some or all of your workers on a piece-rate basis, it might be time to make some changes. To avoid liability for unpaid waiting time, make sure you pay separate hourly compensation for all non-piece-rate work, as well as other hours during which the piece-rate workers aren’t working but are nonetheless subject to your control (for example, because they can’t leave the premises).

Practice tip: The court’s reasoning regarding the compensation of piece-rate workers could also apply to workers paid under commission-based or other incentive-based systems.