Further Down the Rabbit-Hole we go: California’s Troubling Treatment of Incentive-Based Compensation Systems

On July 17, 2013, the California Supreme Court denied review of the Second Appellate District’s decision in Gonzalez v. Downtown LA Motors, 2013 Cal. App. LEXIS 257 (Cal. App. 2d Dist. Mar. 6, 2013), which addressed minimum-wage requirements for piece-rate workers. The Court of Appeal held that the employer had to pay a separate hourly rate of at least minimum wage during work time when piece-rate employees are engaged in compensable activity that does not directly produce piece-rates. 

Gonzalez affirmed the trial court’s holding that a class of auto mechanics who were paid piece-rates for performing repair work were entitled to a separate hourly minimum wage for time spent performing non-repair work, such as waiting for vehicles or cleaning work stations. The trial court found that the defendant car dealership violated state minimum wage by not paying separately for the non-piece rate producing time because California does not allow an employer to satisfy minimum wage by averaging compensation over the entire pay period. The decision expands the controversial holding in Armenta v. Osmose, Inc. [135 Cal. App. 4th 314 (2005)] from hourly rate employees to piece-rate employees. Armenta broke new ground by holding that California minimum wage law differs from federal law under the Fair Labor Standards Act. The FLSA permits employers to measure minimum wage compliance by determining an average hourly rate for the pay period. Armenta and its progeny, including Gonzalez, instead focus on individual hours (or minutes) of the day.

Neither the Court of Appeal nor the Supreme Court were apparently swayed by arguments “that affirming the judgment in this case will require piece-rate employers to pay additional hourly wages for every mandatory rest break, will have far-reaching negative consequences on all incentive compensation systems in California, including commission payment plans, and will open the floodgates to litigation challenging incentive-based compensation systems.” While the decision stressed that its holding is limited to the particular facts of the case, employers have good reason to be concerned. Gonzalez will spur additional lawsuits alleging that any incentive pay structure—whether piece-rate, commission or otherwise—violates California minimum wage law to some degree. This is so because employees who are paid with incentives can always claim that at least some of their work time is “non-productive,” employers do not separately track such time, and it is impractical (and frequently impossible) to do so. Gonzalez’ holding that piece rate employees must be paid separately for compensable rest breaks and other “non-productive” work hours is a troubling development, and carries California law further down the rabbit-hole that Armenta created.