July 1, 2016 Deadline Approaching for Notice To Take Advantage of Critical Backpay Provisions

As we reported in last December’s Piece Work Compensation is a Wreck Waiting to Happen, The Perils of New Labor Code Section 226.2 (Piece Work), California has implemented detailed requirements for production-based compensation systems beginning January, 2016.  This new law affects whole industries that have grown around such piece work (“by-the-piece”) arrangements, benefiting workers and management. For instance, at levels that on average far exceed the applicable minimum hourly wage, it has been the norm for trucking companies to pay drivers for miles driven or deliveries completed, for auto shops to pay mechanics for repairs accomplished, and for service companies to pay technicians for jobs finished and paid for.

As Piece Work and our April, 2016 article California’s Itemized Pay Stub Requirements explain,  Labor Code 226.2 now requires businesses operating with such pay systems, among other things: • to compensate affected workers at least the applicable minimum wage for each specific hour worked (no averaging permitted); • to accurately calculate and pay affected workers separately for each daily rest and recovery period; and • to include in each affected worker’s stub for each pay period detailed information showing the calculations and sub-totals for each component of the compensation system.  These requirements also apply to companies that only use production as one of several factors in their compensation scheme.

However, section 226.2 provides an important protection to companies that have operated with such piece work systems for any length of time prior to 2016, the so-called “safe harbor” provisions.  As explained in Piece Work, two 2013 California Court of Appeal decisions (Gonzales v. Downtown L.A. Motors and Bluford v. Safeway) directed that an employer is in violation of California’s minimum wage law – which requires such compensation for “every hour worked” – unless that business paid its piece workers separately for rest periods and for payable “non-production” time (for example, staff meetings, training time). Section 226.2(b) permits such businesses to avoid any potential past liability for such underpayments of minimum wage and other piece work-related obligations by fairly calculating a 3% – 4% amount from the gross wages of affected workers between July 1, 2012 and December 31, 2015 and by paying all such amounts, with accurate accounting documentation, by December 15, 2016.

However, in order for an affected employer to take advantage of this “safe harbor” protection, it must by July 1, 2016 give written notice to the Department of Industrial Relations (DIR) that it is engaged in such back pay calculations and payments. The DIR has posted a specific notice form for businesses to utilize by that deadline. The DIR will then post the name of the company giving notice on its public website until July 1, 2017.

An affected company that has missed this July 1, 2016 deadline will thus be subject to claims from any employee(s) who may have been underpaid minimum wages under the Gonzales and Bluford rules extending back as far as four years prior to the date such claim is filed with the DIR or with the courts.  Particularly in alleged class action claims, the potential liability posed upon an employer who has missed that July 1, 2016 notice deadline may well be far in excess of the 3% – 4% payments deemed sufficient under the safe harbor rules to resolve all such issues.

Thus, any California employer that has utilized a piece pay plan at any time since 2012 should place careful attention on Labor Code 226.2 and how it affects operations.  The matter is urgent as the July 1, 2016 safe harbor notice requirement will soon be upon us and then gone. Our lawyers Tim Bowles, Cindy Bamforth, or Helena Kobrin are available for more information.

Tim Bowles, May 20, 2016