In theory, the California Labor Code and the Wage Orders allow employers the freedom to do what employers traditionally have done: pay employees solely with commissions or solely with piece rates. This idea of incentive pay—you reap what you sow— has been around a long time!
But a wave of California judicial court decisions has eroded the once-solid foundations of traditional incentive pay systems. In response, employers have been moving towards complicated hybrid compensation systems.
So what do you need to know when deciding to use one of these incentive or hybrid compensation systems?
Beware: Averaging Earnings Over the Pay Period Is Not Allowed to Satisfy Minimum Wage
Federal law allows employers to average wages over a pay period to meet minimum wage requirements (dividing total compensation by total number of hours worked). California does not. Courts have read California’s minimum wage statute to require employers to pay the minimum wage separately for each hour worked.
The tension between this requirement and traditional commission and piece-rate pay systems became apparent in 2005 in the California Court of Appeal decision in Armenta v. Osmose. In Armenta, employees earned their pay solely through piece rates. The Armenta court held that while the piece rate compensated employees for their “productive time”—time spent actually working on piece-rate tasks—the piece rate did not compensate them for their “non-productive time”—time spent doing anything else.
- What Kinds of Pay Systems Have Employers Used In Response, and Do They Pass Legal Muster?
In an attempt to comply with Armenta, many employers created complicated hybrid hourly and incentive compensation systems. Unfortunately, even these laudable efforts to comply with California law may still expose well-intentioned employers to liability.
For example, in Bluford v. Safeway, the employer paid its truck drivers a certain figure to each mile driven, a piece rate for certain non-driving tasks, an hourly rate for other tasks, and a different hourly rate for unexpected driving delays. Even so, an unsympathetic Court of Appeal held that Safeway’s system violated the Wage Order because the system did not provide separately for an hourly rate for rest breaks, which the Wage Order designates as “hours worked.”
- Another Possibility: What About the Commissioned Salesperson Exemption?
Continue Reading Wage Order Series, Part I: Is Pay For Performance Effectively Extinct?