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November 2016

$54 Million Verdict Against Wal-Mart Illustrates Dangers of Using Flawed Piece-Rate Compensation System

On November 23, 2016, a jury ruled in the U.S. District Court in San Francisco that Wal-Mart owed its approximately 850 truck drivers nearly $54 million for violations of California’s minimum wage law when Wal-Mart failed to pay its drivers under a piece-rate compensation model for all tasks they performed (other than driving), a decision that extends well beyond the trucking industry.  Such non-driving tasks at issue included time spent filling out federally mandated trip slips, routine maintenance and sitting through inspections.  Jurors also found that Wal-Mart failed to provide rest breaks to its drivers and failed to adequately compensate them for federally mandated layover breaks.

Liquidated damages, plaintiffs' attorneys' fees and penalties have yet to be determined. However, if the judge finds Wal-Mart’s defense was not carried out in good faith, such a finding could double the jury’s $54 million award to well over $100 million.

While this case pertains to Wal-Mart’s truck drivers, its implications reach far beyond the trucking industry. Here, Wal-Mart utilized a piece-rate compensation system common in many other industries. Under the piece rate model, employees are paid per completed task (e.g. $2 per widget) rather than compensated for the actual time spent performing their duties (e.g. $10 per hour). The potential downside of such a model is that employees may perform work that is not accounted for under an employer’s piece-rate model or employees may not be compensated for time spent at their place of work, but not actively producing for their employers. 

The seminal case illustrating the dangers of a piece-rate compensation model is Gonzalez v. Downtown LA Motors, LP (215 Cal. App. 4th 36). The Supreme Court in Gonzalez ruled that auto technicians, who were paid on a piece-rate basis, must also be paid at least the minimum hourly wage for the time that they are required to wait between their piece-rate paid repair jobs. 

The legislature, recognizing that many employers’ piece-rate compensation systems are non-compliant and acknowledging the potentially devastating impact of such rulings has instituted a “safe harbor” period allowing employers to provide back pay for uncompensated time.  Enacting, AB 1513 the legislature codified the Supreme Court’s holding in Gonzalez by requiring that piece-rate employees be paid for rest and recovery periods and any other “non-productive” time at an hourly rate that is no less than the legal minimum wage.  However, AB 1513 also provides that an employer may avoid liability for certain kinds of damages and penalties, if the employer: (a) by no later than July 1, 2016, provided written notice to the Department of Industrial Relations of the company’s election to pay back wages, (b) by no later than December 15, 2016, provides such compensation for past uncompensated time from July 1, 2012 to December 31, 2015 to current and former employees who were paid on a piece rate basis; and (c) provides specified notices to the affected employees regarding the compensation being provided under the safe harbor law.  If safe harbor was taken, the employer can raise it as an affirmative defense to related wage and hour claims.

While Wal-Mart argued that activities like inspections, fueling, washing, weighing, and paperwork are subsumed within other activities for which drivers are paid, the judge disagreed holding that a “piece-rate formula that does not compensate directly for all time worked does not comply with California Labor Codes….”  Wal-Mart intends to appeal the verdict as well as several of the judge’s rulings.

There are many benefits to a piece-rate model of compensation for employees but employers would be wise to double check that their piece-rate systems are compliant and adequately compensate their employees for all time spent at work.  This verdict should be taken as a warning to employers and employers should have legal counsel review their current written polices and their implementation.

Employment Law

Employment Law