Court Places CA Piece-Rate Pay Statute’s July 1 “Safe Harbor” Filing Deadline on Hold

On June 30, 2016, Judge Jeffrey Hamilton of the California Superior Court in Fresno County granted a temporary restraining order (TRO) preventing the enforcement of various aspects of California’s new piece-rate pay statute, AB 1513, which became effective on January 1, 2016 and is codified as California Labor Code § 226.2 (Section 226.2). Specifically, the court temporarily enjoined the enforcement of the July 1, 2016 deadline for employers to file notice of their election to invoke the “safe harbor” protections under California Labor Code § 226.2(b)(3). The court also scheduled a July 18, 2016 hearing to consider whether to issue a preliminary injunction as to enforcement of the July 1 “safe harbor” deadline, as well as whether to:

1. enjoin the December 15, 2016 “safe harbor” payment deadline under Section 226.2(b)(4);
2. toll the payment deadline until 197 days after the preliminary injunction expires; and
3. enjoin any requirements in Section 226.2 that are dependent on the phrases “other nonproductive time” or “directly related.”

In addition, the court ordered that in the event a preliminary injunction does not issue, the “safe harbor” election notice filing deadline is tolled until 10 days after the expiration of the TRO.

Background of AB 1513 and the “Safe Harbor” Provisions of Section 226.2

Effective January 1, 2016, California Assembly Bill 1513 (AB 1513) added Section 226.2 to the California Labor Code, creating significant new requirements for piece-rate compensation paid to California employees. The primary effect of Section 226.2 is to require that California employees paid in whole or in part on a piece-rate basis be paid for “rest and recovery periods” and “other nonproductive time” on a separate, hourly basis at specified, differing hourly rates.

AB 1513 was passed in the wake of two California Courts of Appeal decisions regarding piece-rate pay:  Gonzalez v. Downtown LA Motors, LP, 215 Cal. App. 4th 36 (2013) (Gonzalez), and Bluford v. Safeway Stores, Inc., 216 Cal. App. 4th 864 (2013) (Bluford). While those decisions were based on their own unique facts, the California state legislature appears to have read them broadly to require separate hourly pay for rest and recovery periods and so-called “nonproductive time” for any employees paid on a piece-rate basis.

AB 1513 also includes a “safe harbor” provision codified in Section 226.2(b), which creates an affirmative defense for California employers against claims for failure to pay for rest and recovery periods and other nonproductive time for time periods prior to January 1, 2016. To be able to assert the “safe harbor” defense, an employer must satisfy multiple requirements, including the following:

• The employer must pay employees for “previously uncompensated or undercompensated rest and recovery periods and other nonproductive time” worked from July 1, 2012 through December 31, 2015, by one of two methods:
• payment of the “actual sums due” plus statutory interest, for the time period July 1, 2012 through December 31, 2015; or
• payment of 4 percent of the employee’s gross wages in any period from July 1, 2012 through December 31, 2015 in which the employee was paid on a piece-rate basis.
• The employer must, no later than July 1, 2016, give written notice to the California Department of Industrial Relations (DIR) that it elects to make payments to its employees pursuant to this “safe harbor provision.”
• Payments must be made to employees “as soon as reasonably feasible” and no later than December 15, 2016.
• Employees must be provided with a statement reflecting the method used to calculate the amount owed, and a detailed spreadsheet or other statement showing the payment calculations.

See Cal. Labor Code § 226.2(b).

Challenge to the “Safe Harbor” Deadline and Other Aspects of AB 1513

On June 27, 2016, the Nisei Farmers League, an agricultural business association, filed a lawsuit in California’s Fresno County Superior Court (Case No. 16CECG02107), seeking injunctive and declaratory relief on the grounds that AB 1513 violates employers’ due process and other rights under the U.S. and California constitutions.

First, Nisei challenges that Section 226.2 creates constitutionally impermissible vague requirements by purporting to codify the holdings of Gonzalez and Bluford, which it contends were “incorrectly decided.”

Second, Nisei challenges that, by requiring hourly pay for rest and recovery periods and other nonproductive time separate from piece-rate pay, Section 226.2 has “effected a radical change in the law governing piece-rate compensation.”    

Third, Nisei challenges that Section 226.2 is unconstitutionally vague with respect to the terms “other nonproductive time” and “actual sums due.”  Nisei argues that it would be unreasonably difficult for an employer to determine what tasks would be considered “productive” under the statute. In addition, due to these ambiguities as well as unsettled questions about what separate wages were actually due prior to AB 1513 and how to calculate them, Nisei asserts that an employer cannot reasonably comply with the statute’s “safe harbor” provision.

Based on these challenges, Nisei asserts claims for due process violations, violations of both the Takings Clause and the Contracts Clause of the U.S. Constitution, and related claims for declaratory and injunctive relief.

On June 30, 2016, the court issued its order granting the TRO, temporarily enjoining enforcement of portions of Section 226.2 and tolling its “safe harbor” deadlines. The court also scheduled a hearing for July 18, 2016 to consider whether a preliminary injunction against enforcement of portions of the statute should be granted.    

Significance for Employers

• For nearly any California employer that uses piece-rate compensation for its employees, Section 226.2 imposes substantial obstacles to the continued use of legacy piece-rate pay compensation programs, and creates potential liability for allegedly uncompensated past rest and recovery periods and “other nonproductive time.” 
• The TRO in place and Nisei’s ongoing litigation challenging Section 226.2 raise the possibility that some or all of Section 226.2 could be further enjoined and ultimately invalidated as unconstitutional.
• Regardless of the outcome of the July 18, 2016, preliminary injunction hearing, the validity of Section 226.2 is likely to remain in doubt while this challenge is considered by the court (and through the inevitable appellate review that will follow).
• Further, even if Section 226.2 is upheld as enforceable, California employers wishing to utilize its “safe harbor” provision likely now will have until at least July 28, 2016 (10 days after the scheduled July 18, 2016 hearing) to give notice to the DIR of their election to avail themselves of such affirmative defense.

For questions regarding California piece-rate compensation issues or any other employment law issues, please contact the authors, your McGuireWoods contact, or any other member of the firm’s labor and employment group.