1. Department of Industrial Relations

Frequently Asked Questions

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

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:

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 only 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. Also note that while section 226.2 applies only to piece-rate employees, the court in Vaquero v. Stoneledge Furniture LLC, 9 Cal.App.5th 98 (2017), found that similar pay requirements apply to commission employees, including the right to be compensated separately for required rest breaks. For a detailed discussion of commissions, see the Division of Labor Standards 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:

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:

(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:

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):

(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:

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:

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:

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 makes 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.

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

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

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

*Providing Statement to Unpaid Wage Fund in Electronic Format

Employers are encouraged to use the Form 40  when reporting wage payments to the Unpaid Wage Fund. An electronic copy of the Form 40 or other statement should be placed on a password-protected CD or thumb drive that is sent along with the physical payment. (Please include contact information on the cover letter, so the Labor Commissioner’s staff can contact you to obtain the password.)  Otherwise, the information can be sent by email to 3rdPartySettlements-UWF&AB1513@dir.ca.gov .  If sent by email, the transmission should be encrypted, and the sender will also need to provide enough information in the email message to associate the transmission with the items arriving by regular mail. 

**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."

Q. What if an employer sent checks to former employees before the deadline but those checks were never cashed?

A. If the checks are no longer negotiable or still remain uncashed after a reasonable amount of time has passed, employers can turn over the outstanding payments to the Unpaid Wage Fund.  Employers are encouraged to follow the instructions listed above when turning over these payments, but may take the payments to any office of the Labor Commissioner.

Employee claims about Piece-Rate compensation

Q. How does an employee claim funds that were sent to the Unpaid Wage Fund?

A.Employees eligible for back pay under AB 1513 may have had their payments turned over to the Labor Commissioner’s Unpaid Wage Fund. Employees who believe their payment may have turned over to the Unpaid Wage Fund should use this form to request payment. Please complete the form and mail it to the address below or take it to any local office of the Labor Commissioner.

Department of Industrial Relations
AB 1513 Application
Centralized Cashiering Unit
2031 Howe Avenue, Suite 100
Sacramento, CA 95825

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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August 2021