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Frequently Asked Questions

Piece-Rate Compensation - Labor Code §226.2 (AB 1513)

Topics covered in this section

General information
Piece-Rate compensation and wage statement requirements effective January 1, 2016 and later
The affirmative defense provisions of Labor Code Section 226.2 (Relating to time periods prior to January 1, 2016)
Calculating and making back payments to employees and former employees for purposes of the affirmative defense
Employee claims about Piece-Rate compensation

General Information

Q. When does the law go into effect?

A. By operation of law, AB 1513 went into effect on January 1, 2016.

Q. What does AB 1513 do?

A. AB 1513 adds section 226.2 to the California Labor Code, which applies “for employees who are compensated on a piece-rate basis for any work performed during a pay period.”

In general terms, Labor Code section 226.2 does two things:

  1. It establishes compensation and wage statement requirements for rest and recovery periods and “other nonproductive time” for piece-rate employees going forward from the effective date of the statute.
  2. It establishes, for certain employers and under certain circumstances, an “affirmative defense” to any claim or cause of action for damages or statutory penalties based on an employer’s alleged failure to pay compensation due for rest and recovery periods and other nonproductive time for time periods prior to the effective date of the statute.

Q. What is piece-rate compensation?

A. Labor Code section 226.2 does not change the existing definition of what constitutes “piece-rate” compensation.

The existing Division of Labor Standards Enforcement Manual contains the following explanation of piece-rate compensation:

2.5.1 Piece-Rate or “Piece Work”

The American Heritage Dictionary defines the term piece-rate as: “Work paid for according to the number of units turned out.” Consequently, a piece-rate must be based upon an ascertainable figure paid for completing a particular task or making a particular piece of goods.

2.5.2 Examples of piece-rate plans can be as diverse as the following:

  1. Automobile mechanics paid on a “book rate” (i.e., brake job, one hour and fifty minutes, tune-up, one hour, etc.), usually based on the Chilton Manual or similar;
  2. Nurses paid on the basis of the number of procedures performed;
  3. Carpet layers paid by the yard of carpet laid;
  4. Technicians paid by the number of telephones installed;
  5. Factory workers paid by the widget completed;
  6. Carpenters paid by the linear foot on framing jobs.

2.5.3 A piece-rate plan of compensation may include a group of employees who share in the wage earned for completing the task or making the product.

2.5.5.1 Piece-rate and commission plans may be in addition to an hourly rate or a salary rate of pay. Such plans may also be in the alternative to a salary or hourly rate. As an example, compensation plans may include salary plus commission or piece-rate; or a base or guaranteed salary or commission or piece-rate whichever is greater.

(Reference: DLSE , pages 2-2 to 2-3.)

Q. Does the law apply to employees who work on a commission basis?

A. No, the law does not apply to employees who are compensated on a commission basis.

By its terms, Labor Code section 226.2 applies to "employees who are compensated on a piece-rate basis for any work performed during a pay period." Note, however, that it is the nature of the compensation that is determinative, not the label.

Existing Labor Code section 204.1 defines “commission wages” as: “compensation paid to any person for services rendered in the sale of such employer's property or services and based proportionately upon the amount or value thereof.”

(See also the Ramirez v. Yosemite Water Co. (1999) 20 Cal. 4th 785, 803 [“Although section 204.1 applies specifically to employees of vehicle dealers, both parties contend, and we agree, that the statute’s definition of ‘commission’ is more generally applicable.”].)  

As the Supreme Court explained in the Ramirez case, quoting Keyes Motors, Inc. v. Division of Labor Standards Enforcement (1987) 197 Cal.App.3d 557, 563,

“. . . Labor Code section 204.1 sets up two requirements, both of which must be met before a compensation scheme is deemed to constitute “commission wages.” First, the employees must be involved principally in selling a product or service, not making the product or rendering the service. Second, the amount of their compensation must be a percent of the price of the product or service.’” (Ramirez, supra, 20 Cal. 4th at 803-04.)

The Division of Labor Standards Enforcement Manual contains the following language concerning the difference between piece-rate compensation and commission compensation:

2.5.4 Commission

Labor Code § 204.1 defines commissions as: “Compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.” Keyes Motors v. DLSE (1987) 197 Cal.App.3d 557.

If the compensation is based on a percentage of a sale, the compensation plan is a commission. On the other hand, a compensation plan which pays employees for the number of pieces of goods finished, the number of appointments made or the number of procedures completed, is based on a piece-rate, not a commission rate; though such compensation plans often refer to the payment as “commission”.

2.5.4.1 Shared commissions

Again, as with a piece-rate plan, a commission plan may include a group of employees who share in the commissions earned. (For a detailed discussion of commissions refer to the DLSE Enforcement Manual, Section 34.)

Q. Does this statute change overtime compensation requirements?

A. Labor Code section 226.2 expressly states in the opening paragraph that it “shall not be construed to limit or alter minimum wage or overtime compensation requirements, or the obligation to compensate employees for all hours worked under any other statute or local ordinance.”

This means that in any workweek in which a piece-rate employee worked overtime hours, overtime compensation must be calculated and paid according to existing law.

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Piece-Rate compensation and wage statement requirements effective January 1, 2016 and later

Q. What are the compensation requirements for rest and recovery periods for piece-rate employees?

A. Labor Code section 226.2, subdivision (a), paragraphs (1) and (3) provide that:

  • Employees must be compensated for rest and recovery periods separate from any piece-rate compensation, and
  • The rate of compensation for rest and recovery periods shall be the higher of:
    • An average hourly rate determined by dividing the total compensation for the workweek, exclusive of compensation for rest and recovery periods and any premium compensation for overtime, by the total hours worked during the workweek, exclusive of rest and recovery periods.
    • The applicable minimum wage.

This means that piece-rate employees must be paid compensation for rest and recovery periods that is separatefrom their piece-rate compensation. An employer may not treat the piece-rate compensation as including compensation for rest and recovery periods, no matter how the piece-rate was determined.

The hourly rate of compensation for rest and recovery periods must be the same as the hourly rate (averaged over the workweek) that an employee earned during the workweek for time during which he or she was performing work. If, for some reason, this average hourly rate comes out to less than minimum wage, then the employee must be paid at minimum wage.

Q. How does an employer determine the average hourly rate to be paid for rest and recovery periods?

A. The formula for determining the average hourly rate to be paid for rest and recovery periods is set forth in the statute, as follows:

Divide the total compensation for the workweek, exclusive of compensation for rest and recovery periods and any premium compensation for overtime, by the total hours worked during the workweek, exclusive of rest and recovery periods.”

(Labor Code §226.2(a)(3)(i).)

The following are some examples of application of this formula.

Examples:

1. For a workweek of piece-rate compensation only:

  • A piece-rate employee works a 5-day, 40-hour workweek.
  • The employee has two 10-minute rest periods authorized and permitted per day, for a total of 100 minutes (1.67 hours) of rest periods for the workweek.
  • The employee earns $500 in piece-rate compensation for the workweek.
The average hourly rate to be paid for the rest periods for this employee is calculated as follows:
$500 total compensation not including compensation for the rest periods
÷ 38.33 total hours less rest periods
= $13.04/hr
x 1.67 hrs
rest periods for the workweek
= $21.78 compensation for rest periods for the workweek
Total compensation for the workweek:
$500 piece-rate compensation
+ $21.78 compensation for rest periods
= $521.78
2. For a workweek of piece-rate compensation and a base rate of minimum wage for all hours worked:
  • An employee works a 5-day, 40-hour workweek.
  • The employee has two 10-minute rest periods authorized and permitted per day, for a total of 100 minutes (1.67 hours) of rest periods for the workweek.
  • The employee is paid minimum wage ($10/hour) for all hours worked, including the two 10-minute rest periods, for a total of $400.
  • The employee also earns a total of $300 in piece-rate compensation for the workweek.
The average hourly rate to be paid for the rest periods for this employee is calculated as follows:
$683.30 Total compensation for the workweek, not including compensation for rest and recovery periods, which is the $300 in piece-rate compensation, plus the minimum wage paid for all hours worked except the 1.67 hours of rest period time
÷ 38.33 Total hours less rest periods
= $17.83/hour

Note: $10/hour of this time is already calculated into and paid in the employee’s minimum wage of $10/hour for all hours worked, including the rest period time.

Therefore, the additional amount owed for rest periods under this example is $7.83/hour.

Total compensation for the workweek:
$400 Minimum wages for all hours worked, including the rest period time
+ Piece = rate compensation
+ $7.83 x 1.67 hours = Additional amount over minimum wage required to pay correct average hourly rate for rest periods

3. For a workweek with both piece-rate work and hourly work:

  • An employee works a 5-day, 40-hour workweek.
  • On two 8-hour days of this workweek (for a total of 16 hours), the employee works at an hourly rate of $10/hour, and does no piece-rate work.
  • On the other three days of the week (for a total of 24 hours), the employee does piece-rate work only and earns a total of $300 in piece-rate compensation.
  • On each day of the workweek, the employee has two 10-minute rest periods authorized and permitted, for a total of 100 minutes (1.67 hours) of rest periods for the workweek.
  • On the two hourly-work days, these rest periods are compensated at the $10 hourly wage.
The average hourly rate to be paid for the rest periods for this employee is calculated as follows:
$453.30 Total compensation for the workweek, not including compensation for rest and recovery periods, which is the $300 in piece-rate compensation, plus the $160 for hourly work, less $6.70, which is the compensation for the 40 minutes of rest and recovery periods on the two hourly-rate days.
÷ 38.33 Total hours, which is 40 hours less the 1.67 hours of rest period time
= $11.83/hour Note: For the days on which the employee worked at an hourly rate, $10/hour of this time is already been paid as part of the hourly rate. For those two days, the employee is owed only an additional $1.83/hour for the rest periods. For the days on which the employee did piece-rate work, the rate to be paid for the rest periods is $11.83.
Total compensation for the workweek:
$160 For the hourly rate worked on two days
+ $300 Piece-rate compensation
+ $1.83 x .67 hours = $1.23 The additional amount owed for the rest periods on the hourly rate days to bring them to the average hourly rate for the workweek.
= $473.06

4. For a workweek of piece-rate compensation and overtime hours:

  • An employee works a 6-day, 47-hour workweek, for which 7 hours constitute overtime.
  • The employee has two 10-minute rest periods authorized and permitted per day, for a total of 120 minutes (2.0 hours) of rest periods for the workweek.
  • The employee earns a total of $800 in piece-rate compensation for the workweek.
The average hourly rate to be paid for the rest periods for this employee is calculated as follows:
$800 Total compensation for the workweek, not including compensation for the rest and recovery periods or premium pay for overtime.
÷ 45 hours Total hours, not including the rest and recovery periods.
=

$17.78/hour

x 2.0 hours

= $35.56
Compensation for rest and recovery periods for this workweek.
The overtime premium compensation for this employee is:
$800 Piece-rate compensation
+ $35.56 Compensation for rest and recovery periods
= $835.56
÷ 47 hours
= 17.78/hour Regular rate of pay
x .5
= $8.89 Premium pay due for overtime hours
x 7 hours Overtime hours
= $62.23
Total compensation for the workweek:
$800 Piece-rate compensation
+ $35.56 Compensation for rest and recovery periods
+ $62.23 Premium pay for overtime hours
= $897.79

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 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.

Q. What types of compensation must be included in determining the average hourly rate to be paid for rest and recovery periods?

A. The statute says that the average hourly rate shall be “determined by dividing the total compensation for the workweek, exclusive of compensation for rest and recovery periods and any premium compensation for overtime, by the total hours worked during the workweek, exclusive of rest and recovery periods.”

As indicated above, the statute refers to “total compensation” for the workweek. This type of formula is similar to the manner in which employers are currently required to calculate a regular rate of pay for overtime compensation purposes. The Division of Labor Standards Enforcement Manual contains information on the types of compensation within a workweek that generally must be included for this purpose and those that are not. (See DLSE Manual, §49.1 to 49.1.2.3 (items to be included) and §49.1.2.4 (types of compensation not included.)

Q. What are “rest and recovery periods”, as referred to in the statute?

A. Labor Code section 226.2 does not change the definition for rest and recovery periods. Those terms have the same meaning as they do under existing law.

“Rest” periods are defined and required under a number of existing wage orders. For example, existing Wage Order 1 (Manufacturing Industry) contains the following provision regarding rest periods:

12. Rest Periods

A. Every employer shall authorize and permit all employees to take rest periods, which insofar as practicable shall be in the middle of each work period. The authorized rest period time shall be based on the total hours worked daily at the rate of ten (10) minutes net rest time per four (4) hours or major fraction thereof. However, a rest period need not be authorized for employees whose total daily work time is less than three and one-half (3 1/2) hours. Authorized rest period time shall be counted as hours worked for which there shall be no deduction from wages.

B. If an employer fails to provide an employee a rest period in accordance with the applicable provisions of this order, the employer shall pay the employee one (1) hour of pay at the employee's regular rate of compensation for each work day that the rest period is not provided.

(Wage Order 1, ¶12, 8 CCR section 11010.)

Most of the existing wage orders contain similar, or identical, provisions on rest periods.

Existing Labor Code section 226.7 defines a “recovery period” as “a cooldown period afforded an employee to prevent heat illness.”

Labor Code section 226.7 also provides that:

(b)   An employer shall not require an employee to work during a meal or rest or recovery period mandated pursuant to an applicable statute, or applicable regulation, standard, or order of the Industrial Welfare Commission, the Occupational Safety and Health Standards Board, or the Division of Occupational Safety and Health.

In Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1029, the California Supreme Court said the following concerning rest periods (applying Wage Order 5):

Employees are entitled to 10 minutes rest for shifts from three and one-half to six hours in length, 20 minutes for shifts of more than six hours up to 10 hours, 30 minutes for shifts of more than 10 hours up to 14 hours, and so on.

(Id. at 1029.) See also Brinker, supra, 53 Cal.4th at 1033 (“An employer is required to authorize and permit the amount of rest break time called for under the wage order for its industry.”)

Q. Does Labor Code section 226.2 mean that employers will need to track the number of minutes that employees actually take for their rest and recovery periods?

A. No. Section 226.2, subdivision (a)(2) requires that an employee’s itemized wage statement state “[t]he total hours of compensable rest and recovery periods, the rate of compensation, and the gross wages paid for those periods during the pay period.” (Emphasis added.)

If an employer has authorized and permitted two 10-minute rest periods during an employee’s work shift (see quote from Brinker above), the “compensable” rest and recovery periods are those that have been authorized and permitted according to existing law. That is the amount of time for which an employee must be compensated (i.e., the “compensable” period), and which must be itemized on the wage statement, regardless of whether the employee actually took only 8 minutes on one rest period (less than the amount of time that was “compensable”), or took 13 minutes on another rest period (more than the amount of time that was “compensable”).

Similarly, for recovery periods (“a cooldown period afforded an employee to prevent heat illness,” see Labor Code section 226.7), the employer will need to determine the amount of time that was “afforded” (i.e., authorized and permitted), which may depend on the circumstances. The amount of time that was afforded is the amount of time for which employees must be compensated (i.e., the “compensable” period) and which must be itemized on the wage statement.

Q. Why are there different rules for employers who pay on a semi-monthly basis?

A. Actually, the compensation requirements for rest and recovery periods are the same for all employers, including those that pay on a semi-monthly basis. For employers who pay on a semi-monthly basis, however, there is a provision that allows the employer to pay for rest and recovery periods at a rate of at least the minimum wage for the pay period in which the rest and recovery periods occurred, and then to “true up” the compensation owed (to pay “the additional compensation required”) applying the average hourly rate formula that is required and explained above, in the following pay period. This is because when a semi-monthly pay period ends in the middle of a workweek, it may not be possible to determine the “average hourly rate” for that workweek at the time the paycheck is issued for that payroll period.

This is consistent with existing rules in Labor Code section 204 that apply to employers who pay wages on a semi-monthly basis. That section provides, for example, that “all wages earned for labor in excess of the normal work period [e.g., overtime] shall be paid no later than the payday for the next regular payroll period.” (Labor Code §204(b)(1) (language in italics added).)

Q. What is “other nonproductive time”?

A. Labor Code section 226.2 defines “other nonproductive time” as “time under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis.”

What constitutes “other nonproductive time” under this definition will obviously vary depending upon the nature of the work and the “activity being compensated on a piece-rate basis.”

Q. What are the compensation requirements for other nonproductive time?

A. Labor Code section 226.2, subdivision (a)(1) and (a)(4) provide that:

  • Employees must be compensated for other nonproductive time separate from any piece-rate compensation, and
  • Employees must be compensated for other nonproductive time “at an hourly rate that is no less than the applicable minimum wage.

This means that piece-rate employees must be paid compensation for “other nonproductive time” that is separate from their piece-rate compensation. An employer may not treat the piece-rate compensation as including compensation for other nonproductive time, no matter how the piece-rate was determined.

The compensation requirement for other nonproductive time is simply that it be paid at an hourly rate of no less than the applicable minimum wage.

The statute also contains a kind of “safe harbor” provision in subdivision (a)(7), which states:

An employer, who in addition to paying any piece-rate compensation pays an hourly rate of at least the applicable minimum wage for all hours worked, shall be deemed in compliance with paragraph (4).

This means that if an employer pays a base hourly rate of at least the applicable minimum wage for all hours an employee works, in addition to any piece-rate compensation, the employer will be deemed in compliance with the compensation requirements for other nonproductive time.

Q. Does an employer need to track the amount of other nonproductive time worked by an employee who is compensated on a piece-rate basis?

A. It depends. If the employer utilizes the “safe harbor” option of subdivision (a)(7) (i.e., “in addition to paying any piece-rate compensation, pays an hourly rate of at least the applicable minimum wage for all hours worked”), then the compensation and wage statement requirements for other nonproductive time are satisfied, and the employer is not required to determine or to record the actual amount of hours worked in other nonproductive time. (See §226.2(a)(2)(B); (a)(4); (a)(7).)

If the employer does not use this “safe harbor” option of paying an hourly rate of at least minimum wage for all hours worked, then the amount of hours worked in other nonproductive time must be determined (§226.2(a)(5)), listed on the wage statement, (§226,2(a)(2)(B)), and compensated separately at an hourly rate of at least minimum wage (§226.2(a)(4)).

Subdivision (a)(5), however, provides that “[t]he amount of other nonproductive time may be determined either through actual records or the employer’s reasonable estimates, whether for a group of employees or for a particular employee, of other nonproductive time worked during the pay period.” (Labor Code §226.2(a)(5).) This allows employers the option of determining the amount of other nonproductive time worked based on a reasonable estimate, rather than actual tracking of time.

Subdivision (a)(6) further provides that:

An employer who is found to have made a good faith error in determining the total or estimated amount of other nonproductive time worked during the pay period shall remain liable for the payment of compensation for all hours worked in other nonproductive time, but shall not be liable for statutory civil penalties, including, but not limited to, penalties under Section 226.3, or liquidated damages based solely on that error, provided that both of the following are true:

A. The employer has provided the wage statement information required by subparagraph (B) of paragraph (2) and paid the compensation due for the amount of other nonproductive time determined by the employer in accordance with the requirements of paragraphs (4) and (5).

B. The total compensation paid for any day in the pay period is no less than what is due under the applicable minimum wage and any required overtime compensation.

In general terms, this means that if an employer makes a good faith error in determining the amount of other nonproductive time for a worker, whether determined through records or based on an estimate, in that the employee actually worked more other nonproductive time than was in the estimate or as otherwise determined by the employer, the employer remains liable to compensate the employee for all of the other nonproductive time the employee actually worked (at an hourly rate of at least minimum wage), but will not be liable for any statutory penalties.

This provision is subject to the two qualifications in subparagraphs (A) and (B), quoted above, including that the employer must have paid the employee at least minimum wage and any required overtime compensation on that minimum wage.

Q. Are there any wage statement requirements under this law?

A. Yes. Labor Code section 226.2, subdivision (a)(2) provides that:

The itemized statement required by subdivision (a) of [Labor Code] Section 226 shall, in addition to the other items specified in that subdivision, separately state the following, to which the provisions of Section 226 shall also be applicable:

  1. The total hours of compensable rest and recovery periods, the rate of compensation, and the gross wages paid for those periods during the pay period.
  2. Except for employers paying compensation for other nonproductive time in accordance with paragraph (7), the total hours of other nonproductive time, as determined under paragraph (5), the rate of compensation, and the gross wages paid for that time during the pay period.

As indicated in the language in italics above, an employer is not required to state the total hours of other nonproductive time, the rate of compensation, or the gross wages paid for that time, if the employer “in addition to paying any piece-rate compensation, pays an hourly rate of at least the applicable minimum wage for all hours worked,” as authorized by the “safe harbor” language in subdivision (a)(7).

The wage statement requirements should be read in tandem with the current requirement under section 226, subdivision (a), that an itemized wage statement show “all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee…” (§226(a)(9)). To the extent there may be overlap between this provision and section 226.2(a)(2) going forward, the requirements will be harmonized. Employers will not be required to state the same information twice on the wage statement.

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The affirmative defense provisions of Labor Code Section 226.2
(Relating to time periods prior to January 1, 2016)

Q. Does the statute have any effect on time periods prior to January 1, 2016?

A. The statute does not contain a provision stating that it is declarative of existing law. The compensation requirements for rest and recovery periods and other nonproductive time that are set forth in subdivision (a) of section 226.2 apply going forward as of the effective date of the statute (January 1, 2016), and do not change the law as it existed prior to that date. Issues as to what was required under applicable law prior to January 1, 2016 may be the subject of ongoing disputes and litigation in the courts.

Subdivision (b) of the statute, however, creates an “affirmative defense” for certain types of claims that may be pending in existing litigation, or that might be asserted in future litigation, with respect to time periods prior to January 1, 2016.

Q. What is the affirmative defense that is created by the statute for time periods prior to January 1, 2016?

A. Labor Code section 226.2, subdivision (b) provides, in part, as follows:

Notwithstanding any other statute or regulation, the employer and any other person shall have an affirmative defense to any claim or cause of action for recovery of wages, damages, liquidated damages, statutory penalties, or civil penalties, including liquidated damages pursuant to Section 1194.2, statutory penalties pursuant to Section 203, premium pay pursuant to Section 226.7, and actual damages or liquidated damages pursuant to subdivision (e) of Section 226, based solely on the employer’s failure to timely pay the employee the compensation due for rest and recovery periods and other nonproductive time for time periods prior to and including December 31, 2015, if, by no later than December 15, 2016, an employer complies with all of the following:…

The statute then sets forth a number of requirements an employer must meet in order to have the affirmative defense authorized by subdivision (b), quoted above.

In general terms, what this means is that, for time periods prior to January 1, 2016, an employer may be relieved of any liability for damages and statutory and other penalties, arising out of claims asserting a failure to pay compensation for rest and recovery periods and other nonproductive time, if the employer meets all of the requirements set forth in the statute.

Q. What does an employer need to do in order to have the affirmative defense created by the statute?

A. Subdivision (b) of the statute says that an employer must comply with “all of the following,” and then lists several requirements. The first listed requirement is that:

The employer [must] make[] payments to each of its employees, except as specified in paragraph (2), for previously uncompensated or undercompensated rest and recovery periods and other nonproductive time from July 1, 2012, to December 31, 2015, inclusive, using one of the formulas specified in subparagraph (A) or (B):

  1. The employer determines and pays the actual sums due together with accrued interest calculated in accordance with subdivision (c) of Section 98.1.
  2. The employer pays each employee an amount equal to 4 percent of that employee’s gross earnings in pay periods in which any work was performed on a piece-rate basis from July 1, 2012, to December 31, 2015, inclusive, less amounts already paid to that employee, separate from piece-rate compensation, for rest and recovery periods and other nonproductive time during the same time, provided that the amount by which the payment to each employee may be reduced for amounts already paid for other nonproductive time shall not exceed 1 percent of the employee’s gross earnings during the same time.

There are several additional requirements set forth in subdivision (b), paragraphs (3) through (5), including that:

  • The employer must give notice to the Department of Industrial Relations by no later than July 1, 2016 of its election to make payments to its current and former employees pursuant to the statute.
  • The payments must be completed by December 15, 2016.
  • The payments to employees must come with a statement summarizing how the payment was calculated.
  • The employer must use due diligence to locate and pay former employees.
  • Payments for former employees who cannot be located must be made to the Labor Commissioner’s Unpaid Wage Fund (with an additional administrative fee).

Pursuant to an Order of the Fresno Superior Court, the State was temporarily restrained from enforcing the July 1, 2016 deadline for employers to submit notice of their election to make payments to current and former employees pursuant to Labor Code Section 226.2(b). Th e Director of Industrial Relations continued to accept and post these notices through July 28, 2016, when the temporary restraining order expired and the Court declined to extend it.

Q. If an employer elects to make the payments and meet the other requirements in order to have the affirmative defense, does the employer have to make payments to former employees?

A. Yes. The statute requires payments to “each” of the employer’s employees “for previously uncompensated or undercompensated rest and recovery periods and other nonproductive time,” determined by using one of the formulas quoted above. Subdivision (a)(1) requires the employer to use due diligence to locate and pay former employees.

Payments are not required, however, for any time periods for which:

  1. An employee has, prior to August 1, 2015, entered into a valid release of claims not otherwise banned by this code or any other applicable law for compensation for rest and recovery periods and other nonproductive time.
  2. A release of claims covered by this subdivision [was] executed in connection with a settlement agreement filed with a court prior to October 1, 2015, and later approved by the court.

(See Labor Code §226.2(b)(2).)

In general terms, this means that payments are not required for employees who have previously settled claims related to compensation for rest and recovery periods and other nonproductive time.

Q. What is the notice that must be provided to the Department of Industrial Relations?

A. An employer that elects to participate in the affirmative defense provisions of the statute, must provide a written notice to the Department of Industrial Relations, by no later than July 1, 2016, of the employer’s election to make payments to its current and former employees.

The notice “must include the legal name and address of the employer and must be mailed or delivered to the Director of Industrial Relations, Attn: Piece-Rate Section, 226.2 Election Notice, 1515 Clay Street, 17th Floor, Oakland, CA 94612.”

The Department provided a simple online form that was used by employers for this purpose.

The Department will post on its website either a list of the employers who have provided the required notice or copies of the actual notices, and these materials will remain posted until March 31, 2017.

(See Labor Code §226.2(b)(3).)

Q. Is it possible to extend the deadline for providing notice to the Department of Industrial Relations?

A. The statute set a deadline of July 1, 2016.  A court order temporarily extended the deadline to July 28, 2016, but a request for a further extension was denied. Employers who failed to submit a notice by July 28, 2016 no longer have the option of providing this notice.

Q. What type of records does the employer have to provide concerning the payments that are made to employees for the purpose of obtaining the affirmative defense?

A. When an employer elects to make payments to current and former employees pursuant to subdivision (b) of the statute, the employer is required to provide the employee, along with the payment, a statement that, in general terms, explains that the payment is made pursuant to this statute, explains which of the formulas was used to determine the payment (i.e., whether it was actual sums due or the 4%-option), and explains the calculations that were made to determine the total payment.

Specifically:

  • If the payment is based on “actual sums due” option, the employee must be provided “a statement, spreadsheet, listing, or similar document that states, for each pay period for which compensation was included in the payment, the total hours of rest and recovery periods and other nonproductive time of the employee, the rates of compensation for that time, and the gross wages paid for that time.”
  • If the payment is based on the “4%” option, the employee must be provided “a statement, spreadsheet, listing, or similar document that shows, for each pay period during which the employee had earnings during the period from July 1, 2012, through December 31, 2015, inclusive, the gross wages of the employee and any amounts already paid to the employee, separate from piece-rate compensation, for rest and recovery periods and other nonproductive time.”
  • Both types of statements must show “the calculations that were made to determine the total payment made.”

Note that under the 4% option an employer is only required to pay an employee an amount “equal to 4 percent of that employee’s gross earnings in pay periods in which any work was performed on a piece-rate basis from July 1, 2012, to December 31, 2015, inclusive, less amounts already paid to that employee, separate from piece-rate compensation, for rest and recovery periods and other nonproductive time during the same time, . . . .” In other words, the 4% only applies to pay periods in which some work was performed on a piece-rate basis. For purposes of showing the employee how the amount of the payment was determined, however, subdivision (b)(5)(D) requires a statement or similar document that includes all pay periods for which the employee had earnings during the July 1, 2012 to December 31, 2015 time period. This serves the purpose of showing the employee, if relevant, that there may have been pay periods in which he or she did not have any piece-rate earnings, and that the 4% calculation was thus not applied to those pay periods. The purpose of the statement that is required by this provision of the statute is simply to show the employee how the payment was calculated in terms of his or her own earnings history.

In addition, subdivision (d)(3) of the statute requires employers to preserve “all records of hours worked, calculations of hours worked, and records of payments made to employees and the Labor Commissioner pursuant to subdivision (b) and this subdivision, until December 16, 2020, and furnish the records related to an employee on request by the employee.”

Q. Are all employers required to make the payments described in the affirmative defense portions of the statute (subdivision (b))?

A. No. The provisions regarding payments to employees – for purposes of obtaining an affirmative defense to certain claims in litigation, as described in subdivision (b) of the statute – are entirely optional. An employer is not required to make the payments described in subdivision (b), paragraph (1) if it elects not to do so.

Q. What happens if an employer elects not to make the payments described in subdivision (b) of the statute?

A. If an employer elects not to make the payments and undertake the other obligations set forth in subdivision (b) of the statute that are required to obtain the affirmative defense, the employer’s legal rights and obligations under the law as it existed prior to January 1, 2016 remain unchanged and unaffected by this statute.

The requirements set forth in subdivision (a) of the statute go into effect for all employers on January 1, 2016.

Q. Are certain types of claims and cases excluded from the affirmative defense provisions in subdivision (b) of the statute?

A. Yes. In general terms, the affirmative defense provisions of the statute do not apply to cases in which there was a final judgment prior to the effective date of the statute, cases that had been pending and in litigation for a substantial period of time prior to the effective date of the statute (i.e., cases filed before March 1, 2014, with some additional specifications as set forth in the statute, that are likely well advanced in the litigation process), and cases that allege a specific kind of wage theft.

The provisions also are inapplicable to any claims alleging that “employees were not advised of their right to take rest or recovery breaks, that rest and recovery breaks were not made available, or that employees were discouraged or otherwise prevented from taking such breaks.” (§226.2(g)(3).) In other words, the affirmative defense provisions do not apply to claims that an employer did not authorize and permit employees to take rest periods, as distinct from claims alleging a failure to compensate for such periods.

Lastly, the affirmative defense provisions do not apply to employers that are new car dealers as defined in section 426 of the Vehicle Code.

Q. How are the back pay requirements being monitored and enforced?

A. Under the terms of the statute, the employer has an affirmative defense to certain claims if the employer complies with “all of” the obligations set forth in the statute. The Department of Industrial Relations is not authorized to supervise or oversee these payments, and will not issue any approvals or certifications that an employer has or has not followed the process correctly.  Whether the employer met the requirements for the affirmative defense may arise in any dispute over piece-rate compensation, either in litigation or in the context of a wage claim.  In the event of such a dispute, it will be up to the person hearing the dispute (i.e., the judge, hearing officer, or arbitrator) to decide whether the employer performed all of the obligations set forth in the statute in order to obtain the affirmative defense in that particular case.

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Calculating and making back payments to employees and former employees for purposes of the affirmative defense

Q. What does the 4% option (in Labor Code section 226.2 (b)(1)(B)) apply to?

A. The 4% calculation applies to each and every pay period, between July 1, 2012 to December 31, 2015, in which some part of the employee's work was compensated on a piece-rate basis (including if the piece-rate was paid on top of an hourly rate). If an employee had pay periods with no piece-rate earnings (including payroll periods in which he or she was compensated solely on an hourly basis or received only vacation pay), then those pay periods are not included in the calculation. However, all other weeks must be included in the calculation, and the 4% calculation applies to the employee's entire gross earnings in each of those pay periods.

Q. What is “accrued interest calculated in accordance with subdivision (c) of [Labor Code] Section 98.1”?  How is that interest calculated?

A. Labor Code section 98.1(c) provides for interest to accrue on all unpaid wages, from the date wages were due and payable, at the rate specified in subdivision (b) of Civil Code section 3289.  The rate specified in Civil Code section 3289(b) is ten percent per annum simple interest. 

The “date wages were due and payable” refers to the payday when the wages originally were due, and for purposes of Labor Code section 226.2, subdivision (b), corresponds to each payday covering work within the back pay period from July 1, 2012 through December 31, 2015.   A different interest calculation is required for each payroll period for which any wages are due, extending from that payday until the date of payment.  Thus, assuming the employer made these payments in July of 2016, exactly four years after the earliest payday in the period, it would require four years interest (4 years times 10% = 40%) on the additional wages due for that first pay period in July of 2012; and then 3 years and however many weeks interest on the wages due for the following payday; etc.; until arriving at the end of December of 2015, for which there would about 5% interest would have been required (10% per annum times six months = 5%).

Q. What efforts must be made by an employer to locate former employees?  What is meant by “due diligence”?

A. Labor Code section 226.2 does not define what constitutes “due diligence,” other than to state that it includes, but is not limited to “the use of people locator services.” (See Labor Code section 226.2, subdivision (d)(1).)  There are a variety of people locator services available on the Internet through which someone may search a name in an attempt to locate a current address.  Many of these services offer a one-month pass, for a small fee, that allows for an unlimited number of searches.  Given the statute’s reference to the use of people locator services, “due diligence” on an employer’s part likely would require use of one of these services for at least one search per employee for whom the employer does not have a current address.

Beyond this specific requirement, what constitutes “due diligence” would depend on the circumstances.  In general, the concept of due diligence incorporates elements of both reasonableness (what is reasonable under the circumstances?) and good faith (was a genuine effort made?).  As such, relevant factors would include the size of the payment being made to an employee and the nature and extent of the information the employer has about that employee.  For example, if the employer does not have current contact information for a former employee, but continues to employ the former employee’s brother, “due diligence” might require the employer to ask the brother if he has a current mailing address for the former employee.  If, on the other hand, the employer does not have a current address for a former employee, a people locator search is unsuccessful because the former employee has a very common name, and the employer has no other direct information about how to locate that person, then the employer may have done its “due diligence” as to that particular employee.

Another way to approach this question is to put oneself in the shoes of someone who has left the area but is now owed some money by a former employer – what efforts would you reasonably expect that employer to make to find you and make sure you get paid? 

Q. When should an employer do its due diligence, and how should an employer handle a situation in which a check has been sent to a former employee but has not been cashed or returned in the mail?

A. An employer can and should do its due diligence as soon as possible to find or confirm the addresses of former employees. If there is any question about whether an uncashed check reached its intended recipient, the employer may wish to cancel that check and reissue another one if the employer believes that it now has a better address. It probably is also worth the expense to send these checks (and accompanying statements) by certified mail, return receipt requested, so that the employer will have a record that it was delivered to the intended recipient. If the employer has made a diligent effort to track down a good address, but the check still couldn't be delivered, then that employee's payment can be redirected to the Unpaid Wage Fund. On the other hand, if there is no real doubt about the payment (and statement) having actually been delivered to the employee entitled to receive them, and then the employer has done its part, even if the check is not cashed right away.

Q. Is it possible to extend the deadline for making back payments to former employees?  How can an employer do its “due diligence” on checks that are returned after the December 15 deadline and yet still get the unpaid funds to the Labor Commissioner by that deadline?

A. The December 15 deadline is in the statute and cannot be changed. The statute actually directs employers to begin making payments “as soon as reasonably feasible” and to complete those payments “by no later than December 15, 2016.”  With that in mind, there is no need to wait until December 15 before doing due diligence and making payments.  Employers should first make their best effort to track down a good address (as discussed in the earlier answers to “due diligence” questions) before sending a payment to a former employee.  Sending the payment to that address by certified mail, return receipt requested, will provide confirmation that it was delivered to the intended person.  Then, once the employer has confirmed which employees received their payments, the employer can determine which former employees were not successfully located and redirect their payments to the Unpaid Wage Fund. 

Q. How does an employer go about making payments to the Labor Commissioner "pursuant to [Labor Code] Section 96.7" for former employees who could not be located?

A. Employers who have elected to participate in the affirmative defense provisions of the statute are required, among other obligations, to make "payments by no later than December 15, 2016, to each employee to whom the wages are due, or to the Labor Commissioner pursuant to Section 96.7 for any employee whom the employer cannot locate." (Labor Code section 226.2(b)(4) [emphasis added].) Labor Code section 96.7 refers to the Industrial Relations Unpaid Wage Fund.

Employers must use due diligence to track down and pay former employees. If unsuccessful, the money due to employees who cannot be located must be paid into the Unpaid Wage Fund. This payment must be accompanied by an additional administrative fee equal to one-half of one percent of the "aggregate payments made" or $2,500, whichever is less.

Instructions for making payments to the Unpaid Wage Fund:

Required items:

1. A statement in both printed and electronic format that lists the following information for each employee covered by the payment:

  • Name
  • Net amount payable to the employee after withholding*
  • If available, employee's last known address and social security number

2. One check for the total of all amounts being paid into the Fund at that time for employees who could not be located.

Make this check payable to:
INDUSTRIAL RELATIONS UNPAID WAGE FUND

3. A second check equal to ½ of 1% (.005) of the amount in item 2 or $2500.00, whichever is less.

Make this check payable to:
LABOR ENFORCEMENT AND COMPLIANCE FUND

Please send all of these items by no later than December 15, 2016, to the following address.

Department of Industrial Relations
Division of Labor Standards Enforcement
CASHIERING UNIT
2031 Howe Avenue, Suite 100
Sacramento, CA 95825

We recommend sending everything by certified mail, return receipt requested, in order to confirm timely delivery and receipt.

*Note On Payroll Taxes and Withholding:

The payments to be made to employees and former employees under Labor Code section 226.2 are in the nature of back wages or supplemental wages, and are subject to payroll taxes, tax withholding, and tax reporting. This is true of both the payments made directly to current and former employees who are located, and for former employees who could not be located and whose payment will be made into the Unpaid Wage Fund. If an employer is making a payment into the Unpaid Wage Fund for a former employee who could not be located, the employer should perform all tax withholding, tax payment and tax reporting for that payment, and pay only the net amount due to the employee into the Unpaid Wage Fund.

If employers have questions about how to properly handle payroll taxes, withholding and reporting for these payments, they may contact the EDD Taxpayer Assistance Center at 1-888-745-3886.

Finally, employers are reminded of their obligation under subdivision (d)(3) of Section 226.2 to "preserve all records of hours worked, calculations of hours worked, and records of payments made to employees and the Labor Commissioner . . . until December 16, 2020, and furnish the records related to an employee on request by the employee."

Employee claims about Piece-Rate compensation

Q. What can an employee do if an employer violates the piece rate pay requirements?

A. An employee who has not been paid compensation due under Labor Code section 226.2 or any other wage and hour law can bring a legal claim to recover wages due and possibly related damages and penalties. Generally speaking, there are three ways to present such a claim - through the Labor Commissioner, through an alternative dispute resolution system such as arbitration (if required or allowed under an employment agreement), or through a lawsuit in court. Employees pursuing the first option can file an individual wage claim with the Labor Commissioner's Wage Claim Adjudication Unit, or they can file a Report of Labor Law Violation with the Labor Commissioner's Bureau of Field Enforcement, which does not pursue individual claims, but may investigate and cite the employer. More information about wage claims and employee rights in general is available on the Labor Commissioner's website or any of the Labor Commissioner's local offices.

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October 2016