Law360, New York (January 8, 2016, 12:34 PM ET) -- Assembly Bill 1513, signed into law on Oct. 10, 2015, was enacted to address piece-rate pay issues in California, both lookingbackward and going forward. Many questions have been posed in its aftermath. First, for context:

  1. Two lawsuits, Bluford v. Safeway (piece-rate workers must be separately paid for rest and recovery time), and Gonzalez v. Downtown LA Motors (piece-rate employees must be separately paid for other (other than rest time) nonproductive time (NPT)), created substantial litigation and massive retroactive liability for employers. These decisions reversed decades of the accepted practice, blessed by federal law, of simply ensuring that the piece rate yielded no less than the minimum wage for all hours worked, including rest time and NPT. Penalties for failure to pay proper wages and provide proper reports, even if innocent, can be 15 to 20 times the wage itself. Only workers represented in the class actions filed (and their counsel) were beneficiaries.
  2. To compound the matter, the Division of Labor Standards Enforcement took the position that rest time must be separately paid at the average piece rate, while employers argued, with very strong support in the Bluford opinion, that the higher of the minimum wage or contractual hourly wage was the appropriate rate. Litigation on the issue against the DLSE was pending, but proceeding very slowly. (In the meantime, the Washington Supreme Court ruled, based on similar statutes, that rest time must be paid separately at average piece rate.)
  3. There was no definition anywhere as to what constituted NPT. Thus, some contended that simply turning around the tractor at the end of a row was NPT that must be tracked minute by minute, and separately paid.
  4. The costs of fighting rest time and NPT claims in court and the potential penalty exposure were becoming untenable.

Against this backdrop, a working group including Labor Department staff, Teamsters and American Federation of Labor staff, and attorneys for certain growers — starting from a template developed a year earlier — collaborated on what ultimately became the bill. The dedication of the labor secretary and countless hours devoted by his staff were crucial in bringing about the compromise that was signed into law by California Gov.Jerry Brown.

The Safe Harbor Provisions

An eligible employer who elects the safe harbor has an affirmative defense that eliminates — without penalties — unpaid rest time and NPT claims against that employer for all work performed before Jan. 1, 2016. (There are some exceptions that are not addressed in this article.) Employers should run the numbers before deciding to either take advantage of the security of the safe harbor or risking litigation and penalties. To be in the safe harbor, an employer must file, by July 1, 2016, the simple election form on the DLSE website and pay each  piece-rate employee the 4 percent safe harbor amount, less deductions set forth below, or the “actual” sum due under applicable law plus interest (which is very unlikely to be lower than the 4 percent safe harbor amount and few employers would have the records necessary to do the alternative calculation). The 4 percent safe harbor amount is computed as follows:

  1. First determine the actual gross pay earned by the employee for pay periods during which that employee performed some work on a piece-rate basis between July 1, 2012, and Dec. 31, 2015.
  2. Next multiply the actual gross pay by 4 percent.
  3. Then deduct payments that actually were made for rest time and NPT (the rest time deduction has no limitation but the NPT deduction may not exceed 1 percent of actual gross pay). No interest payment is required.

Example 1: Assume Mary, a piece-rate employee of ABC Farms for the entire period, was paid $400 for rest time, $200 for NPT and $20,000 in total gross wages. The safe harbor payment to her would be 4 percent of $20,000, less $600, equaling $200.

Example 2: John, an employee of XYZ Farms is paid $10 an hour for every hour worked, plus additional piece-rate pay, for the entire period. Assume John had two hours of rest time and no NPT. The credit to which XYZ Farms would be entitled against the 4 percent figure would be two hours times $10, equaling $20. (Credit for NPT for an employer who pays for every hour worked is complicated; it will depend on how well the NPT — such as time every day for calisthenics — was tracked.) If credits exceed the 4 percent, no payment is due.

 The relevant payments must be completed by Dec. 15, 2016. It has been estimated that safe harbor payments to covered workers will exceed $200 million. A list of those employers who opt in will be published. Applicable statutes of limitations on rest time and NPT claims are tolled for the first six months in 2016 under the new law.

The New Definition of NPT

Defining what is and what is not NPT has been no easy task, particularly given the wide variety of compensation plans that may be defined as pay "on a piece-rate basis" (“piece-rate basis” is not defined in AB 1513) and the number of affected industries. Thus the NPT definition included in the statute deliberately provides a new touchstone or guide post for NPT. The statute provides: " ... ‘other non-productive time' means time under the employer's control, exclusive of rest time and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis" (emphasis added). Thus, turning around the tractor obviously directly relates to the activity paid at the piece-rate and is not NPT, while waiting substantial time for a customer to bring in a car for repair is not directly related and therefore is NPT. What falls in-between remains to be determined. But “directly related” is a broad new definition that could and should cause a real change and narrowing in how NPT has been defined in the past.

Rest Time Starting Jan. 1, 2016

Rest time is calculated, for pay periods in which an employee is engaged in piece-rate activity, by dividing the total compensation (exclusive of rest time payments and any overtime premium) for the pay period, by total hours worked exclusive of rest time. For example, assume that, in a particular pay period, Joe worked no overtime, 20 hours weeding a field at a contractual pay rate of $10 per hour and, exclusive of rest time, another 20 hours harvesting at a piece-rate that  yielded $14 per hour. Total compensation, exclusive of rest time payments, would be $480 ($200 for weeding and $280 for piece-rate), which is $12 per hour (exclusive of rest time), or 20 cents per minute. Assuming five days worked and two rest time periods of 10 minutes each taken per day, that would be 100 minutes of rest time and rest time pay of $20. AB 1513 requires a weekly accounting, reflected on pay stubs, of the rest time calculation in piece-rate pay weeks.

NPT Starting Jan. 1, 2016

Employers must separately pay NPT at the higher of a relevant contractual hourly rate or minimum wage. (Unlike rest time, NPT is not based on an average wage in the period.) An employer has at least three options for separately paying NPT, with different reporting requirements:

  1. An employer who pays at least the minimum wage for all hours worked and then pays any piece-rate incentive compensation on top of that has fully satisfied the obligation to separately pay for NPT and it need not track or report it.
  2. An employer may make an estimate of the amount of NPT in a pay period and pay employees based on that estimate. The employer reports the estimate on the pay stub and the amount earned based on that estimate. If the estimate is later contested and is found to be in error, but the error was in good faith, no penalties will apply.
  3. An employer may choose to actually track, record and report NPT. As with payment of estimated NPT, an employer who makes a good faith error is not subject to penalties. (Assume, for example, an employer reasonably concludes that an activity is not properly categorized as NPT because, in its view, it is “directly related” to the job being paid at a piece-rate. If employees disagree and mount a challenge and it is determined that the employer was incorrect, penalties should not be recoverable.) 

The DLSE website, recently updated, provides further information. The new law contains various provisions and exceptions that are not described in this article.

Published by California Law 360, Employment Law360, and Food & Beverage Law360 on
January 8, 2016.