Vaquero v. Stoneledge Furniture LLC

Welcome to another Friday’s Five video.  In this video I discuss five things every California employer needs to know about meal and rest breaks.  The items consists of a some reminders, but also new court decisions issued in December 2016 and the first quarter of 2017.  This is always a topic employers need to continually pay attention to in California.

Here are links to articles I’ve published as referenced in the video:
Timing requirements for meal and rest breaks

Rest break requirements when employees still subject to recall by employer

Commissioned and piece rate employees must be compensated separately for rest breaks

Happy Friday.  As always, please let me know if you have any suggestions for topics for future posts.

This week, in Vaquero v. Stoneledge Furniture LLC, a California appellate court issued a decision explaining employer’s obigations to separately compensate employees paid on a commission basis for rest breaks.

Plaintiffs worked as sales associates for Stoneledge Furniture, LLC, a retail furniture company doing business in California as Ashley Furniture HomeStores.  Stoneledge paid the sales associates on a commission basis.  The compensation agreement set out that if a sales associate failed to earn “Minimum Pay” of at least $12.01 per hour in commissions in any pay period, Stoneledge paid the associate a “draw” against “future Advanced Commissions.”  The commission agreement required that “[t]he amount of the draw will be deducted from future Advanced Commissions, but an employee will always receive at least $12.01 per hour for every hour worked.”

The issue addressed by the court was employees paid on a commission basis entitled to separate compensation for rest periods as required by California law, and if so, did Stoneledge’s draw-based compensation system pay for rest breaks?  This Friday’s Five addresses five takeaways from the court’s holding for California employers.

1. IWC wage orders

The appellate court explained that the legislature authorized the Industrial Welfare Commission (IWC) to regulate “the wages, hours, and working condition of various classes of workers to protect their health and welfare.”  The IWC has promulgated wage orders that set out regulations based on industries, and there are currently 18 wage orders.  The court explained: “As a consequence, ‘wage and hour claims are today governed by two complementary and occasionally overlapping sources of authority: the provisions of the Labor Code, enacted by the Legislature, and a series of 18 wage orders, adopted by the IWC.’”  Even though the IWC was defunded in 2004, the wage order are still in effect.  A list of the  Wage Orders for the various industries can be found here.

2. Rest periods

With respect to rest periods, Wage Order No. 7 provides:  “Every employer shall authorize and permit all employees to take rest periods, which insofar as practicable shall be in the middle of each work period. The authorized rest period time shall be based on the total hours worked daily at the rate of ten (10) minutes net rest time per four (4) hours or major fraction thereof.  However, a rest period need not be authorized for employees whose total daily work time is less than three and one-half (3 1/2) hours.  Authorized rest period time shall be counted as hours worked for which there shall be no deduction from wages.

Wage Order No. 7 requires employers to count “rest period time” as “hours worked for which there shall be no deduction from wages.”  (Cal. Code Regs. tit. 8, § 11070, subd. 12(A), italics added.)  In Bluford v. Safeway Stores, Inc. (2013) 216 Cal.App.4th 864 the court interpreted this language to require employers to “separately compensate[ ]” employees for rest periods where the employer uses an “activity based compensation system” that does not directly compensate for rest periods.  (Id. at p. 872.)

3. Piece-rate workers must be paid for rest periods and non-productive time under Labor Code Section 226.2

Piece-rate workers are paid “according to the number of units turned out.”  For example, piece-rate workers are paid for the amount of produce harvested, the number of miles driven, or the yard of carpet installed.  Employers cannot deduct wages for rest periods from piece-rate workers, and therefore employers must separately compensate employees for rest periods.

Employers who paid employees on a piece rate basis must comply with Labor Code section 226.2.  Under Labor Code section 226.2, piece-rate workers must be paid for “rest and recovery periods and other nonproductive time separate from any piece-rate compensation.”  The law requires employers to calculate the regular rate of pay for each workweek, and then pay the piece-rate employees the higher of this regular rate of pay or the applicable minimum wage for rest break time.  The law also requires employers to pay piece-rate employees for “nonproductive time” which is defined as “time under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis.”  The nonproductive time is required to be paid at a rate no less than the applicable minimum wage rate.  In addition, employers who pay employees on a piece-rate basis need to report the pay for rest breaks, recovery periods, and nonproductive time separately on the employees’ pay stubs.

The court explained that piece-rate compensation plans do not directly account for and pay for rest periods because the employee is not working during the rest period and therefore is not being paid.  The Wage Order requires employers to separately compensate employees for rest periods if an employer’s compensation plan does not already include a minimum hourly wage for such time.

4. The court in Stoneledge held that the requirement to separately pay for rest periods applies to employees paid on commission as well

The primary holding Stoneledge is that Wage Order No. 7 applies “equally to commissioned employees, employees paid by piece rate, or any other compensation system that does not separately account for rest breaks and other nonproductive time.”

The court found that the commission agreement used by Stoneledge was “analytically indistinguishable from a piece-rate system in that neither allows employees to earn wages during rest periods.”  The court explained that “[w]hen an employer pays its employees by the piece… those employees cannot add to their wage during rest breaks; a break is not for rest if piece-rate work continues.” The court held that Labor Code Section 226.2, which requires piece-rate workers to be compensated for rest, recovery, and other nonproductive time, applies to commissioned employees as well.

5. Commission arrangements that advance wages that are offset against future commission earnings do not compensate employees for rest breaks

The court held that Stoneledge’s commission agreement did not properly compensate for rest periods taken by sales associates who earned a commission instead of the guaranteed minimum payment.

Stoneledge argued that under the compensation plan “all time during rest periods was recorded and paid as time worked identically with all other work time. . . .  Thus, Sales Associates are paid at least $12 per hour even if they make no sales at all.”  Even though Stoneledge deducted previous draws on commissions paid to the sales associates, Stoneledge argued that the “repayment [was] never taken if it would result in payment of less than the [Minimum Pay of $12.01 per hour] for . . . all time worked in any week.” Therefore, Stoneledge contended that the rest breaks were paid.

However, the court did not agree:

For sales associates whose commissions did not exceed the minimum rate in a given week, the company clawed back (by deducting from future paychecks) wages advanced to compensate employees for hours worked, including rest periods.  The advances or draws against future commissions were not compensation for rest periods because they were not compensation at all.  At best they were interest-free loans.

Piece-rate and commissioned based compensation structures must comply with very strict rules in California.  Employers are wise to have assistance from experienced counsel in drafting the compensation plans to ensure compliance.