Piece or “Flag” Rate and Commission Earnings Cannot Be Averaged Over a Workweek to Satisfy California Minimum Wage Obligations

For those California employers who pay commission or fixed-fee “piece rates” to employees tied to the performance of one primary type of work, those employers now need to pay a separate hourly wage or salary for the performance of any other kinds of work that those employees perform.  In other words, a commission or piece rate that is directly tied to only one type of work cannot be used to “cover” an entire range of services performed under California law, even if those services are indirectly related to the work that directly generates the commission or earns the piece rate. 

Under the federal Fair Labor Standards Act (“FLSA”), employers may lawfully average an employee’s earnings over the total hours worked in a workweek to determine if minimum wage requirements are satisfied.  For example, if a commissioned employee works a total of 40 hours and is paid $400.00 in commissions in a workweek, the average hourly pay for the employee is equal to $10.00 per hour.  Because $10.00 per hour exceeds the statutory minimum, the employer has satisfied its minimum wage obligations under the FLSA regardless of whether some of the work performed during the workweek is not directly tied to commissioned sales. 

Two recent opinions have held that, under California law, employers are not similarly permitted to average piece rate or commission earnings over all hours worked to satisfy minimum wage requirements.  Instead, California employees must separately be paid at least minimum wage for time spent on activities that do not allow them to directly earn wages, in addition to any piece rate payments or commissions earned during the work period. 

Dealership’s Flag Rate Pay Plan For Service Technicians Violates California Law 

On April 2, 2013, the California Court of Appeal for the Second Appellate District ordered published its March 6, 2013 opinion in Gonzalez v. Downtown LA Motors, LP ¹, which held that an automobile dealership that compensates its service technicians on a “piece” or “flag rate” basis for repair work must also pay those technicians a separate hourly minimum wage for time spent doing other things such as: waiting, cleaning, attending meetings, reading repair bulletins, obtaining parts, picking up cars from other locations, and participating in online training.  The court ruled that failure to pay this separate hourly minimum wage was a violation of California law.

Downtown LA Motors’ (“DTLA’s”) compensation scheme, common to the automotive retail industry, provides that technicians are paid a flat rate ranging from $17 to $32 per hour, depending on the technician’s experience, for each “flag hour” a technician accrues.  Flag hours are assigned to service tasks based on the amount of time expected to complete each task (as set by the manufacturer, who in this instance is Mercedes-Benz).  A technician who completes a repair task accrues the number of flag hours assigned to the task, regardless of how long the task actually took to complete.  Technician pay is then calculated by multiplying the number of flag hours accrued during the pay period by the technician’s hourly flag rate.  Service technicians are thus rewarded for efficiency whenever they take less than the allotted flag hours to complete a task. 

However, under DTLA’s pay plan, technicians only accrue flag hours when working on a repair order.  Flag hours are not accrued while technicians wait for repair orders, or perform other duties, such as cleaning their work stations or attending meetings.  To ensure that technicians earn at least minimum wage, on average, DTLA requires technicians to record their actual hours worked, and then calculates the earnings the technician would receive if paid minimum wage for all hours the technician is “on the clock” during the pay period.  If the technician’s flag rate/flag hour earnings fall short of this minimum wage “floor,” DTLA supplements the technician’s pay in the amount of the shortfall.  Thus, according to the dealership, minimum wage requirements are satisfied because the employee never earns less than minimum wage for all hours worked during a pay period.

The Court of Appeal disagreed.  The Gonzalez court observed that, contrary to federal law, which requires payment of minimum wage to employees on a “work week” basis, California law requires payment of minimum wage to employees “for all hours worked.”  (Wage Order No. 4, subdivision 4(B).)  The court held that this Wage Order provision and prior decisional authority express California’s intent that employees be compensated at the minimum wage for “each and every separate hour worked.”  Because the technicians only earn their flag rates when working on a repair order, they do not earn any direct compensation for each hour spent waiting for repair work or performing other, non-repair tasks. 

The court further held that DTLA’s compensation scheme also violates California Labor Code sections 221, 222, and 223, which “require an employer to pay all employee hours at either the statutory or agreed rate and prohibit an employer from using any part of that rate as a credit against its minimum wage obligation.”   By averaging piece rate wages over total hours worked, the hourly rate actually paid to technicians for their flag hours is lower than the flat rate they are promised for that repair work under their employment contracts, and the dealership is effectively crediting wages accrued during flag rate hours to pay non-piece rate hours, in contravention of these Labor Code provisions.

Based on its conclusion that DTLA service technicians are not directly compensated for each hour they spend waiting or performing other non-repair tasks, the Court of Appeal affirmed the trial court’s award of $1.55 million, inclusive of interest, to 108 technicians based on average uncompensated waiting time of 1.85 hours per day, as well as $237,000 in penalties to separated employees for failure to pay all wages due upon termination.  On April 2nd, the Court issued an Order denying DTLA’s Petition for Rehearing.

Retail Sales Commission Plan Held to Violate California Law

Late last year, a California Federal District Court reached a similar conclusion respecting a sales associate commission plan in Balasanyan v. Nordstrom. ²   Nordstrom is a retailer that pays its salespeople a commission based on net sales, with a guaranteed minimum.  At the end of each pay period, Nordstrom calculates each salesperson’s commission and compares it to the amount they would have received if they had been working at the $10.85 per hour “guaranteed minimum draw rate.”  If the commissions per “selling hour” equal or exceed the guaranteed minimum, Nordstrom pays commissions.  If the commissions do not equal or exceed the guaranteed minimum, Nordstrom pays the employee’s commission plus the amount necessary to bring the employee up to the “guaranteed minimum draw rate” for all “selling time.”  “Selling time” includes 1.5 hours of non-commission producing activities per shift, such as stocking and pre-opening and post-closing assignments.  Nordstrom separately pays employees an hourly rate for other “non-selling” time.

Plaintiffs brought claims under both the federal FLSA and California law asserting that their commission pay could not be used to compensate them for time spent on non-commission producing activities.  On summary judgment, the court held that Nordstrom’s compensation plan was lawful under the FLSA, because employers are permitted to average employee wages over the total time worked in a week to determine if minimum wage requirements are satisfied under federal law.  Because the average hourly salaries of Nordstrom employees exceed minimum wage, either through commissions or the minimum guaranteed draw rate, there is no FLSA violation.

However, the court held that Nordstrom’s commission plan violates California law.  Like the court of appeal in DTLA, the court in Nordstrom held that employers cannot average employee wages over total hours worked to satisfy California’s minimum wage law.  Rather, California “employees must be directly compensated at least minimum wage for all time spent on activities that do not allow them to directly earn wages.”  Nordstrom argued that stocking and pre- and post-opening activities are related to, and increase, commissioned sales.  However, the court held that “compensation must be directly tied to the activity being done, whether it is selling on commission or preparing to sell on commission;” and that “activities that are only indirectly related to sales or services must also be compensated.”  Because Nordstrom salespersons are not compensated directly for stocking, pre-opening, or post-closing time, during which they usually cannot earn a commission, those hours were uncompensated by Nordstrom’s commission plan under California law. 

The trial court therefore denied Nordstrom’s motion for summary judgment on Plaintiff’s California law-based minimum wage claims.  Nordstrom’s request for permission to file for interlocutory appeal of the summary judgment order was denied last month. 

Recommendations

Both of these decisions are subject to further challenge and the deadline to seek appellate review has not passed.  In the meantime, however, California employers should review their piece rate and commission-based pay plans to determine whether employees are directly paid at least minimum wage for each hour worked.  If employees spend time performing duties that are not directly compensated through piece-rate or commission wages, employers should modify their pay plans to avoid potential liability for failure to comply with California’s minimum wage and wage deduction laws.   The decision to rewrite compensation plans must be made on a case-by-case basis and should only be done in conjunction with knowledgeable counsel.  

For more information, please contact the Automotive or Labor and Employment groups at Arent Fox. 

¹ Gonzalez v. Downtown LA Motors, LP , 2013 WL 820723 (Cal. App. 2 Dist., March 6, 2013).

² Balasanyan v. Nordstrom, Inc. , — F.Supp.2d—, 2012 WL 6675169 (S.D. Cal. Dec. 20, 2012).