California case calls flat rate into question

Jan. 1, 2020
A California appellate court decision may turn long-standing flat-rate/piece-rate payment practices on their head and could pose a significant challenge for compensation strategies.

A recent California appellate court decision may turn long-standing flat-rate/piece-rate payment practices in that state on their head, and could pose a significant challenge to autobody and mechanical shops when it comes to compensation strategies.

In an unpublished decision handed down in early April, the California 2nd District Court of Appeal held that piece-rate-paid employees must be paid a separate hourly rate for time spent on the clock not related to their piece-rate repair work.

The class-action suit was brought by auto service technicians employed by Downtown LA Motors (DTLA), a California Mercedes-Benz dealership. The court ordered the dealership to pay the class members compensation for time spent on non-repair tasks and wait time, as well as applicable penalties under California Labor Code section 203, subdivision (a).

The dealership paid repair technicians a set rate for their flag (repair) hours. The company calculated tech pay for each period by multiplying the flag hours accrued by the flat rate. All other non-repair hours were also tracked, and used to determine how much each tech would have earned based on hours on the clock multiplied by the minimum wage. If the flat-rate compensation fell below minimum wage requirements, the dealership made up the difference.

The technicians involved in the suit claimed the dealership failed to pay a minimum wage for wait time between repairs. The trial court found in their favor. In its appeal the dealership argued that it had complied with California wage laws because the company made up the difference if the compensation for hours on the clock fell below the applicable minimum wage. However, citing an earlier case (Armenta v. Osmose Inc., 2005), the court found that the company could not average piece-rate wages across all hours worked. (Testimony at trial also indicated there were times when the dealership failed to cover the shortfall between wages and the minimum wage floor.)

Under Federal law, the flat-rate compensation system in place at the dealership would satisfy minimum wage requirements, because the company averaged the pay across total actual hours worked. The interpretation of the Armenta case used in the new ruling holds that non-flag hours should be compensated at least at the minimum wage, separate and apart from the amount earned while performing repairs.

The problem, according to many attorneys familiar with the auto repair industry, is that Armenta did not directly deal with a piece-rate pay system, but with hourly employees governed by a collective bargaining agreement. The Armenta decision put case law at odds with the language in California's own Division of Labor Standards Enforcement (DLSE) manual.

The California Wage Orders require that employers must pay "not less than the applicable minimum wage for all hours worked in the payroll period, whether the remuneration is measured by time, piece, commission, or otherwise."

"The case sets the entire flat-rate/piece-rate system in California upside down, and is contrary to decades of established precedent and direction from the California Department of Labor Standards Enforcement," says Cory King, an attorney with Fine, Boggs & Perkins LLP in San Marcos, Calif., and chair of the Collision Industry Conference (CIC) Human Resources Task Force.

The court specifically avoided the issue of whether other commission- or incentive-based compensation systems would be viewed under this ruling, but it could potentially render such payment programs unlawful unless other standards are met. DTLA is appealing the judgment to the California Supreme Court.

In the meantime, shops in California that use the flat-rate compensation system (the majority of shops) are advised to consult with their legal counsel experienced in the auto repair industry and with flat-rate payment plans to evaluate their compensation programs.

Subscribe to ABRN and receive articles like this every month….absolutely free. Click here.