By now California employers are aware of AB 1513, codified as California Labor Code section 226.2 as of January 1, 2016. AB 1513 generally requires employers to pay “piece-rate” employees a separate hourly wage for rest and recovery periods and “other nonproductive time.” (See SHLC Blog post on AB 1513: https://suttonhague.com/governor-signs-piece-rate-compensation-bill-into-law/ )This new law is partially in response to several well-publicized California cases on minimum wage and piece-rate pay, such as Armenta v. Osmose, Gonzalez v. Downtown LA Motors, and Bluford v. Safeway, Inc. These cases held that employees must be paid for each hour of work and piece-rate workers are entitled to be separately paid at least minimum wage for time they were not actually earning a piece-rate (such as paid rest periods and preparatory activities).

In response to these cases, some employers shifted from a pure piece-rate system to an hourly-plus-bonus system. For example, instead of earning $1 for each widget produced, the employee earns$10 per hour (i.e., minimum wage) plus $0.25 for each widget produced. The employee was paid his or her base hourly wage of $10 during rest breaks and the employer complied with then-existing law. Such an arrangement, however, in the opinion of the California Labor Commissioner, appears to be unlawful under AB 1513.

Potential Pitfall of Hourly-Plus-Bonus Structures – Rest Breaks
The Labor Commissioner – charged with enforcing payment of wages rules in California – has offered the following guidance on AB 1513:

• Q: If an employer pays a base hourly rate for all hours worked (for example, minimum wage), but also pays additional piece-rate compensation, is it sufficient for the employer to just pay minimum wage for the employee’s rest breaks?
• A: No. Going forward, the new statute requires compensation at an average hourly rate determined by dividing total compensation by the total hours worked in the workweek, as explained above. This encourages employees to take their authorized rest breaks, without feeling that doing so will decrease their compensation.

(See SHLC Blog post on AB 1513 Resources: https://suttonhague.com/piece-rate-legislation-ab-1513-resources-available-on-dlse-website/)

Now, according to the Labor Commissioner, an hourly-plus-bonus arrangement is subject to the same AB 1513 requirement that rest and recovery periods be paid at the “average hourly rate” as if a pure piece-rate method was used.

The Bonus Question: What Constitutes a Piece-Rate?
Many employers that moved to an hourly-plus-bonus or similar model will need to review their practices to determine whether their bonus can be construed as a “piece-rate.” For example, an employer might use a system like the one described above, where an hourly rate is paid and a production bonus is paid for each item produced. Alternatively, an employer might pay an hourly rate and offer a production bonus based on an employee’s efficiency in quickly completing a task (i.e., $20 for completing the task in under 30 minutes), or on the achievement of specified production quota.

How can an employer know whether the “bonus” in its hourly-plus-bonus system is a piece-rate that triggers the obligation to use the “average hourly rate” calculation for its employees’ rest and recovery period pay?

“Piece-rate” itself is not defined in AB 1513, but according to DLSE, “a piece-rate must be based upon an ascertainable figure paid for completing a particular task or making a particular piece of goods.” Based on this definition, any bonus paid for completing an individual task likely would qualify as a piece-rate, as would a bonus paid for each item produced. Accordingly, the bonus paid in the widget example above is a piece-rate (at least according to the Labor Commissioner) because it pays an ascertainable amount of compensation—$0.25—for each item produced. The employer in this example must pay the “average hourly rate” for its employees’ rest and recovery periods.

On the other hand, a bonus based on efficiency (i.e., the time it takes an employee to complete a task or produce an item) is arguably not be a piece-rate because it focuses on time rather than quantity produced. The same goes for a bonus based on quality of work (i.e., how well an employee performs a task or the quality of the employee’s production output).

If It Looks, Quacks, and Acts Like a Duck . . .
The Labor Commissioner does recognize a distinction between production bonuses and piece-rates in the DLSE Enforcement Policy and Interpretations Manual, but does not define “production bonus” to draw a clear line between piece-rate pay and non-piece-rate bonus pay. However, the more a production bonus plan looks like a traditional piece-rate plan, the more likely the Labor Commissioner will enforce it like a piece-rate plan.

What This Means for Employers
Employers using an hourly-plus-bonus or similar compensation structure should reassess their approach in light of AB 1513. A base hourly rate paid for rest and recovery period time may be undercompensating employees under AB 1513. It may be necessary to apply the “average hourly rate” calculation to determine the correct rate of pay for rest and recovery periods. Failure to comply with AB 1513 could subject an employer to back wages and extremely costly penalties, including Private Attorneys General Act (“PAGA”) penalties.

Employers with questions or concerns regarding whether their pay structure meets the requirements of AB 1513 should consult with qualified legal counsel.