Gonzalez: A New Law Effective January 1, 2016!

A very good friend, and mentor of mine, Art Silbergeld, (Norton Rose Fullbright) has been practicing Labor Law for well over 35 years. He was involved in the Gonzalez v. Downtown Motors, Inc. case from the outset. I recently asked him his opinion about what employers should do in light of the Gonzalez decision. The following was written and offered by him.

“Companies that utilize piece rate or flag hour compensation face serious risks if they do not modify their pay practices immediately.

For years, many California dealers and repair shops have used flag hour pay to incentivize service technicians to be more productive, providing increased compensation when their output exceeds the company’s minimum expectations.  Highly productive employees who worked hard and increased efficiency over time have earned multiples of minimum wage.

In the age of electronics, when paid for flag hours, most service technicians recorded the time when they started work, time out and back in for lunch, and the time when work ended for the day on their work PCs.  They used separate software to record each task to which a flag hour rate applied, noting the starting and ending time for each compensable task.  At the end of each payroll period, a human resources manager or software program would compare the two electronic records to ensure that gross pay met minimum wage and overtime standards for all hours worked.  If, for some reason it did not, additional pay would be added to bring compensation for the period to the level of minimum wage. Employers assumed that if the minimum wage (or higher) was met, it was pay for all hours worked. In over 90 years, no one — not even the State — ever claimed that this violated California law.

In the last 5 years, flag hour pay has been repeatedly challenged in California wage class litigations.  We represented the defendant in the first cutting-edge case, Gonzalez v. Downtown Motors, Inc., resulting in a California appellate court ruling for the first time that piece rate pay did not compensate employees for “down time” in between compensable tasks.  A separate appellate court later ruled that piece rate/per mile pay did not compensate employees for rest periods.  These courts held that “down time” and rest periods had to be paid separately because California does not allow pay averaging.  These decisions have upended pay practices in several industries, including manufacturing, retail auto service departments, transportation, and agricultural companies.

Effective January 1, 2016 Labor Code 226.2 requires employers who have not already abandoned flag hour/piece rate pay to separately compensate employees at an hourly minimum rate for meal and rest periods as well as recovery time (resting when workplace temperatures are too hot) when they are not engaged in work for which they will be paid.  An analyst for industry alone estimates that the cost of compliance will be $200 million.

Damages in these cases go back at least three years.  New Labor Code 226.2 provides a safe harbor, allowing employers with exposure to liability to avoid litigation, fines and penalties by paying affected employees up to three years of back pay by December 31, 2016.  The cost, however, may be prohibitive.  The Gonzalez trial court imposed damages based on underpayment of 1.85 hours per day. Employers who have used a flag hour or piece rate system within the last 3 years should, at least, consider converting to a base hourly rate pay program with an incentive bonus that allows employees to continue to earn as much as they had under the prior pay practice.”

Well, there you have it. Art’s advice is excellent. Please pay attention to the deadlines offered and if you have any questions please do not hesitate to contact me by email (paaerrep@aol.com).


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