Court of appeals finds that employer’s compensation program does not violate California’s distinctive “no wage borrowing” rule

Unlike the FLSA, California labor law does not permit employers to average total compensation over an employee’s pay period to determine if they were paid at or above minimum wage for the period. Rather, an employer must separately pay at least minimum wage for each hour worked. This requirement can greatly complicate productivity-based compensation programs, such as piece-rate and commission plans, as there inevitably is non-productive time during which employees are not performing piece work or other work for which they may earn compensation directly. Last year, the California Supreme Court approved the line of cases that established this rule.

In Certified Tire and Service Centers Wage & Hour Cases, a California court of appeals held, in a 2-1 decision, that an employer’s compensation program for its automotive technicians did not violate the “no wage borrowing” rule. The program paid employees the greater of either a guaranteed minimum hourly rate for all hours worked or a base hourly rate based on the technician’s “production dollars”, which was tied to the amount charged to a customer as a result of the technician’s work. Some activities the technicians performed did not generate production dollars. Under the program, “a technician would receive less of an increase over his or her guaranteed minimum hourly rate either when he or she was an inefficient worker who spent too much time performing particular tasks or when he or she performed tasks that did not bring in production dollars. A technician also could not accumulate production dollars during a rest break. However, all of a technician’s tasks and each rest period taken by a technician were always compensated because technicians got paid an hourly rate for all of the time that they were clocked in at work.”

The majority held that the employer was not borrowing compensation contractually owed for some tasks (like work directly on behalf of customers) to pay for non-productive tasks (like cleaning or attending meetings). The technicians were guaranteed a minimum hourly pay rate (which was above the minimum wage) and could make more by earning more in production dollars. The dissent argued that the employer’s compensation program was a thinly-veiled commission pay program that averaged wages over a pay period and impermissibly borrowed from commission-generating activity (production dollars) to pay for rest period and other down time.

We suspect the California Supreme Court may get the final word on the legality of this compensation program.