Deadline Looming for Employers to Elect “Piece-Rate Back Pay” Safe Harbor under AB 1513

It’s decision-making time under AB 1513 for employers of piece-rate workers in California.  More specifically, if you employ piece-rate workers in California, you must give notice to the state’s Department of Industrial Relations by July 1, 2016 if you want to avail yourself of the safe harbor under the statute and secure the complete affirmative defense to claims for failure to pay for nonproductive time for periods prior to December 31, 2015.

If you are asking yourself if this applies to you, here is some background:

Effective January 1, 2016, AB 1513 added a new section to California’s Labor Code (Section 226.2, available in full here) that established compensation and wage statement requirements for nonproductive work time, i.e., rest and recovery periods and other work time that was not directly compensated by a piece-rate workers “piece-rate.”  Formerly, employers would argue that they had built such nonproductive time into the “piece-rate.”  AB 1513 effectively put an end to that.  The DIR has a set of answers to “Frequently Asked Questions” (available here) that is a helpful resource for specific questions.

In brief, Labor Code Section 226.2 requires that piece-rate workers be compensated separate from their piece-rate earnings, based on an average hourly rate, for mandatory rest periods, heat recovery periods, any other time that is not directly compensated by an employee’s piece-rate, e.g., meetings, waiting time, etc. (or “nonproductive time”).  The employee’s wage statement must also separately state certain information related to this compensation.  The formula for calculating an employee’s “average hourly rate” is also set forth in the statute.  The DIR’s FAQ site has good examples of this calculation under various scenarios—hint:  it’s not a simple average.

While AB 1513’s requirements apply from January 1, 2016 (the statute’s effective date) forward, it also prescribes two “safe harbors” for employers to utilize to defend against claims for unpaid nonproductive time.

First, under the statute, an employer is deemed in compliance with its requirement to pay separately for other nonproductive time, if it pays employees at least minimum wage for all hours worked in addition to piece-rate pay.  This safe harbor applies to all nonproductive time except rest and recovery periods.  Employers are required to pay the average hourly rate for all rest and recovery periods during any period the employee is paid on a piece-rate basis.  There is no exception to this.

Second—and the subject of this posting—Employers have an affirmative defense under the statute to any claim or cause of action for failure to pay for rest periods, recovery periods, or other nonproductive time, for time periods before December 31, 2015.  But, to take advantage of this safe harbor, you must pay each of your employees (past and present) for any unpaid or underpaid nonproductive time from July 1, 2012 to December 31, 2015 inclusive.

You can do this by either:

(1) Calculating and paying the actual sums due, plus interest, or

(2) Paying each employee an amount equal to 4% of his or her gross earnings in pay periods during which the employee worked for a piece-rate from July 1, 2012 to December 31, 2015.

If you choose to pay the 4%, you can set off from the payment any amounts already paid directly for nonproductive time to the employee, but no more than 1% of the employee’s gross earnings for the time period.  Under either method, you must provide a statement summarizing how you calculated the payment; you must use due diligence to locate and pay former employees; and you must make payments to the Labor Commissioner’s Unpaid Wages Fund (with additional admin fees) for former employees who you cannot locate.

But, as mentioned, if you want to avail yourself of this protection, you will need to act fast.  Notice to the DIR of a “Piece-Rate Back Pay” election must be given no later than July 1, 2016, and all payments must be complete by December 15, 2016.  The DIR’s website has an easy form that employers can be fill out and submit to provide the DIR with the requisite notice of piece-rate back pay election and which can be found here.

This posting is but an overview of the specific, detailed, and sometimes complex requirements established by AB 1513 and Labor Code Section 226.2.  We encourage you to consider whether the risk of litigation or liability warrants taking advantage of this statutory protection.  For more information about this and other employment issues contact Jennifer Douglas Phillips or Owen Dallmeyer from DP&F’s Employment Group.