Piece-rate employers in California have faced a surge of class action lawsuits in recent years seeking substantial sums for the failure to separately pay for rest breaks and nonproductive time. On January 1, 2016, California Labor Code section 226.2 went into effect, requiring employers to separately compensate piece-rate employees for rest break and nonproductive time. But the statute also offers piece-rate employers a safe harbor option to clear the decks of liability as to certain wage and hour claims, provided the employer makes the election by July 1, 2016. Before this deadline passes, piece-rate employers must take stock of their potential liability and the relative risks of accepting or declining this safe harbor.

The need for safe harbor? Wage and penalty claims for unpaid rest breaks and nonproductive time have proliferated against California piece-rate employers. A wave of California state and federal court decisions, including Bluford v. Safeway Stores, Inc. and Gonzalez v. Downtown LA Motors, have held that employers must make a separate payment for rest break and nonproductive time, in addition to piece-rate compensation. Labor Code 226.2 now provides employers an affirmative defense to these claims for unpaid rest breaks and nonproductive time, as well as the derivative claims for liquidated damages, penalties, premiums, and wage statement violations, for periods prior to December 31, 2015.

What is the price for safe passage? Employers have two alternate payment options. Under the first option, employers may pay the wages for all previously uncompensated rest and recovery periods and nonproductive time from July 1, 2012 through December 31, 2015, along with statutory interest. This option presents a challenge for most piece-rate employers, who are likely not to have tracked nonproductive time. It also invites ongoing challenges as to whether the full amount of nonproductive and rest break time was correctly paid. The safe harbor itself contains a safe harbor, which allows an employer to correct “good faith” miscalculations in the safe harbor payment within 30 days of notice. The employer has the burden of proving, however, that the mistake “was solely the result of good faith error.”

Under the second option, employers may pay a flat 4% of the employee’s gross earnings from July 1, 2012 through December 31, 2015, for pay periods in which a piece rate was paid. This option will generally be the safer, simpler, and cheaper option. For a 40- hour workweek, rest break wages alone will generally amount to slightly over 4% of the employee’s gross wages, even without including any nonproductive time. In addition, unlike the first option, there is no requirement to pay statutory interest. Finally, gross wage records should be accessible and less subject to dispute than estimates of untracked nonproductive time.

Regardless of which method is used, the employer must provide employees statements identifying the payment calculations. In addition, the employer must use due diligence (such as skip tracing) to locate and pay former employees. Payments must be made “as soon as reasonably feasible” after providing notice to the state of the safe harbor election, and must be completed no later than December 15, 2016. In addition, employers must preserve the records regarding payments and the calculations until December 16, 2020.

Get your pass stamped. As a deterrent to would be litigants and plaintiff’s attorneys, employers who have elected the safe harbor will be identified on the California Department of Industrial Relations’ website through March 31, 2017.

Carve outs? Employers currently mired in long-standing litigation of these claims may not qualify. If the complaint was filed prior to March 1, 2014, the claim will likely escape the safe harbor. Claims that are not based on unpaid rest breaks, but rather allege that rest breaks were not permitted, are not subject to the safe harbor. A specific type of wage claim, more commonly asserted in an agricultural context, is also excluded for claims filed prior to April 1, 2015. The defense also does not apply to claims accruing after January 1, 2016.

To the safe harbor or the unprotected seas? The impending deadline forces a risk calculation. For piece-rate employers who have not previously made separate payments for rest breaks and nonproductive time, the payment comes at a substantial discount to potential class litigation exposure. Depending upon the pay practices and specifics of the workforce, some employers are more at risk of wage and hour litigation than others. As the clock continues to tick toward the July 1, 2016 deadline, if you would like assistance in evaluating these risks, please do not hesitate to contact the authors or any other member of Seyfarth’s Labor and Employment Group.