Legal Challenges to Paying Flag Hours and Commissions
Industrial Welfare Commission Order 7-2001 applicable to the Mercantile Industry states plainly that an employer must pay the applicable minimum wage for “all hours worked in the payroll period”. In 2012, the California Supreme Court made clear statements about the IWC orders in Brinker Restaurants, the case which addresses an employer’s meal period obligations: “The text of the wage order is dispositive. . .The best indicator of the [Industrial Welfare Commission’s] intent is the language of the [wage order] provision itself. . .The IWC’s wage orders are to be accorded the same dignity as statutes.” “. . .the IWC’s wage orders are entitled to ‘extraordinary deference, both in upholding their validity and in enforcing their specific terms.’” Isn’t this perfectly clear?
Ignoring the “extraordinary deference” to which the IWC’s orders are entitled, a California appellate court has now adopted a portion of a manual prepared by the Division of Labor Standards Enforcement (DLSE) which states that “all” hours” worked means the minimum wage must be paid for “each and every” hour worked, and applied it to service technicians at an auto dealership. The decision applies this pay obligation only when the flat rate earned by a technician exceeds pay at two times minimum wage: when two times minimum is paid because “flag hour” pay is lower, the decision is inapplicable. Why? Because, in the court’s view, when a technician has gaps in time – “down time” — between flag hour work, he isn’t’ being paid at all. The court’s ruling is based on an opinion in another court of appeal decision involving hourly paid employees, where an employer paid for some hours worked during the payroll period, but not others. When flag hour pay falls below the minimum wage and the employer pays minimum for all hours worked, there is no “down time” that is unpaid.
If applied broadly, the decision could impact not only all piece-rate employees in California, but inside sales persons who are paid commissions.
Dealers are rightfully up in arms. They have for years faithfully relied on the IWC Order and the DLSE’s Keyes Motors formula for calculating the regular rate of pay, which allows spreading piece-rate pay over all hours worked by the employee and applying that regular rate to the number of premium hours to compute overtime pay. The DLSE has long approved this formula and expected dealers to apply it in computing overtime.
The defendant in the pending case has asked the court for reconsideration and, if it is denied, will likely file a petition asking the California Supreme Court to overturn this unwarranted decision. If the decision is not reversed, this and other decisions will eliminate the right to pay piece rate, flag hour and commission pay.
We have assisted numerous employers, including dealerships, in defending and resolving complex wage matters. We are now preparing legal papers to immediately seek a stay of any complaint filed against an employer which challenges the employer’s piece rate, flat rate or commission compensation plan on the grounds stated above. Let us know immediately if a complaint is filed against you and we can assist you.
Arthur Silbergeld in association with Jim Potts