Recently, in Mora v. C.E. Enterprises, Inc., the California Court of Appeal upheld a trial court’s decision in favor of an auto dealership alleged to have used an improper “piece rate” or “flag hours” compensation model.
Two former service technicians alleged that the dealership’s compensation system violated requirements for compensating for productive and non-productive time and failed to comply with Labor Code section 226.2. They claimed they were not fully compensated for all hours worked and sought relief under both traditional wage and hour claims and the Private Attorneys General Act (PAGA).
The court rejected the employees’ arguments, concluding that the dealership’s hourly pay plan complied with California wage laws.
Like many dealerships, C.E. Enterprises previously paid service technicians under a “flag” or piece rate system which assigned a pre-determined amount of time and monetary value to each task. In light of several Court of Appeal decisions, the employer changed to an hourly pay system whereby technicians earned at least double the minimum wage for all hours worked. As part of the new compensation system, employees could earn “flag bonus pay” when their efficiency, measured in “flag hours” assigned per service task, exceeded their guaranteed hourly and overtime earnings.
The trial court found that this “flag bonus” was a true bonus and not piece-rate compensation. In affirming the ruling, the appellate court distinguished C.E. Enterprises’ plan from plans invalidated in a prior Court of Appeal case involving auto dealerships. In that case, the employer averaged productive and nonproductive hours, resulting in what the court referred to as “borrowing” to meet minimum wage obligations. In contrast, C.E. Enterprises paid at least double the minimum wage for all time worked. Because technicians were paid for every clocked hour, including unproductive time, at the same above minimum wage rate, the Court of Appeal held the plan did not run afoul of California’s wage and hour standards.
The court also upheld the employer’s compliance with section 226.2, which governs pay for employees compensated by piece rate. The court held that even assuming the “flag bonus” could be considered piece-rate pay, the employer separately compensated rest and nonproductive periods at an hourly rate exceeding minimum wage.
Plaintiffs’ broader PAGA claims failed as well, both for lack of evidentiary support and procedural deficiencies in their notice to the Labor and Workforce Development Agency.
For California employers, the decision offers useful clarity on pay structures that combine hourly wages with productivity-based bonuses. The key, as highlighted by the Court, is to start by ensuring that employees are compensated for all hours worked – including non-productive time such as rest breaks, at minimum wage or above. Bonuses such as flag incentives should considered be a separate component of pay and may not be averaged or borrowed against to make up minimum wage requirements.
If you have questions about hybrid compensation plans or related issues, contact a Jackson Lewis attorney to discuss.