Landmark wage and hour ruling

On Oct. 4, the California Court of Appeal certified for publication a landmark wage and hour decision upholding the legality of a compensation system that pays for all hours worked and offers additional compensation based on employee production. In Certified Tire and Service Centers Wage and Hour Cases, 2018 DJDAR 10018, three named plaintiffs sought to recover against defendant Certified Tire and Service Centers, Inc. on behalf of two classes of automotive technicians for the defendant's purported failure to pay a separate minimum wage for non-productive time and for off duty rest breaks. Among other things, the plaintiffs alleged violations under the Private Attorneys General Act of 2004, Labor Code Section 2699 and under Business and Professions Code Sections 17200 and 17208.

Certified Tire compensated their technicians under its Technician Compensation Program. Under the program, Certified Tire paid technicians a variable hourly wage for all work performed, guaranteed to be at least an agreed-upon minimum hourly rate, depending on experience, that was equal to or in excess of the legal minimum wage. The technician's hourly rate for a given pay period could increase based on a formula that rewarded the technician for work billed to customers. Using this formula, Certified Tire multiplied the amount billed to the customer as a result of the employee's work, referred to as "production dollars," by 95 percent, and then multiplied that sum by the technician's fixed "tech rate" percentage, which also varied by experience. Certified Tire determined each technician's "base hourly rate" for the pay period by applying this formula. If the base hourly rate exceeded the technician's guaranteed minimum hourly rate, the technician would be paid the base hourly rate. If the guaranteed minimum hourly rate was higher than the base hourly rate, the technician would be paid the guaranteed minimum hourly rate. Notably, the guaranteed minimum hourly wage rate was equal to or greater than the applicable minimum wage.

Some activities that the technicians performed did not generate production dollars because they were not associated with labor costs charged to a customer. For example, tire rotations, cleaning activities, attendance at meetings, and some oil changes did not generate production dollars. While technicians were not able to increase their base hourly rate by performing these activities, they were still compensated for these activities because they were paid an hourly rate for all work while they were on the clock.

During a bench trial, plaintiffs relied on Armenta v. Osmose, Inc., 135 Cal. App. 4th 314 (2005), and subsequent cases in maintaining that Certified Tire did not comply with the minimum wages and rest period requirements set forth in Industrial Wage Commission Order 4. In Armenta, the employer paid workers who maintained utility poles an hourly wage above minimum wage but did not pay employees for driving to job sites or processing paperwork, a practice the employer argued was legal because the average hourly wage was above minimum wage. The court in Armenta concluded that under IWC Order 4, "the FLSA model of averaging all hours worked 'in any work week' to compute an employer's minimum wage obligation under California law is inappropriate." Thus, "when using an hourly-based compensation system, an employer is required to pay at least the minimum wage for each hour worked" and cannot do so by averaging paid and unpaid time. Employees must be separately compensated by an hourly wage.

Plaintiffs used the "averaging" argument to claim that Certified Tire was "secretly paying a lower wage" and, by averaging, was making it appear that they were paying minimum wage "for the non-billed time when, in fact, they're paying nothing for the non-billed time." Plaintiffs also asserted that technicians were not paid for rest breaks because "they cannot add to their wages during those rest breaks. The wages stay the same."

The trial court decision in favor of Certified Tire found that, unlike Armenta, Certified Tire "has not 'averaged' the technicians' hours to calculate their wages" and instead applied the higher base rate. The trial court also found that the technicians had, at all times, been paid a guaranteed minimum wage for all hours worked, whether the work generated production dollars or not.

The rule in Armenta was applied to what the courts considered piece-rate compensation in Gonzalez v. Downtown LA Motors, 215 Cal. App. 4th 36 (2013), and Bluford v. Safeway Stores, Inc., 216 Cal. App. 4th 864 (2013), decisions which were later codified in Labor Code Section 226.2 (2016), effectively transforming piece-rate pay into a bonus.

In Gonzalez, automotive technicians were paid a flat rate, where they accrued "flag hours" of varying value for productive tasks but were not paid separately for non-repair tasks. The employer tracked hours worked and demonstrated that the effective hourly rate was at least minimum wage. When less than minimum wage, the employer supplemented the technician's pay to reach an effective hourly wage equal to the minimum wage. However, the court concluded that under IWC Order 4, this constituted averaging in violation of minimum wage law, and awarded employees separate hourly compensation for non-repair tasks.

Similarly, in Bluford, the court required that an employer paying its truck drivers based on the number of miles driven, a piece-work basis, but not directly paying for rest periods had to separately compensate employees for rest periods. The same principle was later applied to require a furniture store to separately compensate employees for rest periods under commission-based systems in Vaquero v. Stoneledge Furniture LLC, 9 Cal. App. 5th 98 (2017). The court noted a number of federal district court decisions familiar to wage class action attorneys that address piece-rate compensation programs, including Cardenas v. McLane FoodServices, Inc., 796 F.Supp.2d 1246 (C.D.Cal. 2011), Ontiveros v. Zamora, 2009 WL 425962 (E.D.Cal. 2009), Ridgeway v. Wal-Mart Stores, Inc., 107 F.Supp.3d 1044 (N.D.Cal. 2016), and Villapando v. Excel Direct Inc., 161 F.Supp.3d 873 (N.D.Cal. 2016).

In Certified Tire, the Court of Appeal rejected plaintiffs' contention that they were not separately paid for non-productive work and rest periods in an "activity-based compensation system," finding that the Technician Compensation Program was an "hourly-rate system in which technicians are paid at a single hourly rate for all hours worked during the pay period," distinguishing it from the compensation arrangements in Armenta, Gonzalez, Bluford and Vaquero. The court noted that, unlike here, those cases involved either hourly compensation that included off the clock work, a piece-rate system, or a commission-based system. The court found that Certified Tire applied an "hourly based system that compensates technicians for all the time that they are at work. Technicians earn wages for every single work activity that they perform, including waiting for customers and performing tasks that do not have billed labor costs associated with them. Although the hourly rate differs from pay period to pay period because technicians have the opportunity to increase their guaranteed minimum hourly rate based on the generation of production dollars, the technicians are always paid on an hourly basis for all hours worked at a rate above minimum wage regardless of their productivity, and regardless of the type of activity in which they were engaged during those hours."

The Court of Appeal also rejected plaintiffs' argument that technicians were not paid any wages for hours that did not generate production dollars based on hypotheticals in which technicians were paid the same amount despite one technician performing more non-productive work. The court reasoned that "all time on the clock is directly and expressly compensated by Certified Tire at an hourly rate that exceeds the minimum wage."

Finally, the court rejected plaintiffs' argument that technicians were not paid at least minimum wage for each hour on the clock and that Certified Tire was using averaging to demonstrate compliance with minimum wage. Instead, the court found that Certified Tire had established compliance with minimum wage requirements by paying technicians at least minimum wage for every hour that they worked.

The Certified Tire decision cuts through a morass of decided and pending wage class action decisions, providing a clarion guide to California businesses: Pay at least minimum wage (and correct overtime) for all hours worked, and thus, be immunized from the variety of arguments used to attack incentive pay plans. The decision provides an effective safe harbor for many employers who have various and sometimes very inventive productivity incentives and performance bonus plans. Companies that modified their compensation plans after Armenta, Gonzalez, Bluford and Vaquero should examine those plans to ensure that they conform to Certified Tire. The decision should minimize the fear many compliant employers have of being the victim of a meritless wage class action.