Ninth Circuit Upholds Employer’s Piece-Rate Compensation Plan, Other Wage and Hour Practices

Employer’s Compensation Plan

In 2015, California enacted Labor Code section 226.2, which set forth additional rules for compensating employees on a “piece-rate basis.” Piece-rate compensation generally is a system where an employee earns a set amount each time they complete a task. For example, an automobile mechanic might be paid a set amount for every car they repair.

Additionally, Labor Code section 226.2 requires employers who use piece-rate compensation programs to ensure that employees are compensated for their rest breaks and any “nonproductive time” the employee works that is unrelated to the task that earns the piece rate. Using the automobile mechanic example, the mechanic may spend time on the clock cleaning their station for the next vehicle — which is not compensated on a piece-rate basis since it is not work related to fixing a vehicle.

In 2018, in response to this new requirement, J.B. Hunt created a new compensation plan for California-based drivers. Under this plan, it would pay the drivers the minimum wage for all hours worked in their shift. It would also pay an “activity-based bonus amount” for eligible activities, such as miles driven, stops made, and loading and unloading their vehicle. This was known as the Driver Pay Plan.

J.B Hunt then calculated each driver’s pay with this formula: Eligible Activity Pay – Hourly Pay = Activity-Based Bonus Amount. If the result was positive, the employee would get that extra amount on top of their hourly wages. If the result was zero or negative, they would only be paid their hourly amount.

Employees File a Wage and Hour Class Action

In July 2020, three drivers filed a class action lawsuit, alleging several wage and hour violations. Their main claim alleged the Driver Pay Plan was a “piece-rate basis” plan under Labor Code section 226.2, and they were not being compensated separately for nonproductive time or rest breaks.

Additionally, these drivers alleged that they weren’t compensated for off-the-clock work, their wage statements were noncompliant, and they weren’t reimbursed for personal cell phone expenses.

During litigation, the trial court dismissed the drivers’ claims about the Driver Pay Plan, the additional uncompensated work time and noncompliant wage statements. When the drivers’ expense reimbursement claims continued to trial, the jury found in favor of J.B. Hunt. The drivers then appealed their entire lawsuit.

Piece-Rate Safe Harbor

California Labor Code section 226.2(a)(7) provides a “safe harbor” from paying for nonproductive time when the employer pays an hourly rate of at least the applicable minimum wage for all hours worked, in addition to the piece rate. On this basis, J.B. Hunt moved for summary judgment in its favor on the piece-rate claims because its Driver Pay Plan did exactly that. The trial court agreed and dismissed these claims.

The employees appealed this and other trial court decisions to the Ninth Circuit. On appeal, the employees made two arguments. First, they argued that the Driver Pay Plan is just a standard piece-rate compensation plan because whenever a driver’s Eligible Activity Pay is more than their standard hourly wage, the formula only pays the Eligible Activity Pay amount. Also, unlike a standard hourly wage (plus production bonus compensation plan that would satisfy the safe harbor provision of Labor Code section 226.2(a)(7)), the Driver Pay Plan can result in a situation where working more hours doesn’t result in more wages.

To support their argument, the employees used a real example of one driver’s past paychecks. In one pay period, the driver worked 31.78333 hours at $14.25 per hour for a total of $452.92. In that same pay period, the driver also earned $1,033.04 in Eligible Activity Pay. Based on the Driver Pay Plan formula for the Activity-Based Bonus (Eligible Activity Pay – Hourly Wages) the driver earned $580.12 for that bonus. The Driver Pay Plan then takes that amount plus the hourly wages and makes that the compensation for the driver. In this case, it results in $1,033.04 in wages, which is the exact same amount as the total Eligible Activity Pay. J.B. Hunt agreed this is how the pay program works.

Then to prove their point, the employees changed the facts to have the driver work 40 hours instead of 31.78 hours. In that case, the driver earns $570 in hourly wages, but with the same amount of Eligible Activity Pay of $1,033.04. Because of the way the formula works, it still results in pay period wages of $1,033.04. So, according to the employees, this pay plan is just a regular piece-rate compensation program in disguise because the compensation is the same regardless of the hours worked, thus making this program ineligible for the safe harbor.

While the Ninth Circuit agrees that this pay plan is “convoluted,” it doesn’t agree that this makes it ineligible for the safe harbor. The determining factor is that the Driver Pay Plan starts by paying for all hours worked at the minimum wage — whether the time is productive or nonproductive. It then adds on additional piece-rate compensation should the driver qualify according to the formula. The Ninth Circuit highlights that Labor Code section 226.2’s safe harbor provision only requires that the employer pay an hourly rate of at least the applicable minimum wage for all hours worked, in addition to any piece-rate compensation. Because the Driver Pay Plan does this, it satisfies the safe harbor provision.

The employees’ second argument was that when the driver doesn’t earn enough Eligible Activity Pay, they are only paid their hourly rate. This creates an unlawful “minimum wage floor” within its piece-rate compensation plan like that found unlawful in a prior California appellate court decision (Gonzalez v. Downtown L.A. Motors, LP, 215 Cal.App.4th 36, 40 (2013)).

In Gonzalez, a car dealership paid its automobile technicians a piece rate for repair work. If the technician’s piece-rate compensation averaged out over their hours worked to be less than the applicable minimum wage, the dealership would supplement their income to bring them up to the minimum wage for all hours worked. The Court of Appeal found this unlawful because the employees were entitled to separate, additional compensation for nonproductive time, thus resulting in the current version of Labor Code section 226.2, which was codified two years later.

The employees in this case say J.B. Hunt’s Driver Pay Plan is the same exact unlawful compensation scheme because the minimum is there to supplement their work when their piece-rate compensation doesn’t reach the same level of pay. The Ninth Circuit rejected this argument.

The court highlights that the rule in Gonzalez came about because the dealership was taking compensation for the piece-rate work and then spreading it out to other hours owed for nonproductive time. This is not how the Driver Pay Plan works. Instead, the driver receives a minimum wage for all hours worked regardless of the type of work performed and then adds piece-rate compensation should the driver achieve results that make them eligible. The Driver Pay Plan isn’t borrowing compensation from one type of work to cover deficiencies in other types.

As a result, the Ninth Circuit affirmed the trial court's ruling that J.B. Hunt qualified for Labor Code section 226.2’s safe harbor provision and didn’t owe any additional compensation for nonproductive time.

Off-the-Clock Work and Wage Statements

The drivers also argued that even if their piece-rate compensation claims are invalid, separate work was performed that they were never compensated for, even under the Driver Pay Plan. As a result, this means their wage statements were also noncompliant because they didn’t accurately reflect the drivers’ hours worked.

To support this claim, the drivers claimed they performed pre- and post-trip duties before clocking in or after clocking out for their shifts. The timekeeping system was in their trucks, so any work they did before getting in the trucks wouldn’t be captured. This “work” included testimony that J.B. Hunt wanted its drivers to arrive at the yard 45 minutes before their shift and that other drivers would wait at the office for their driving paperwork off the clock before their shift started. They would never clock in before waiting. Because this time was not captured by the hourly rate or Eligible Activity Pay, they were not compensated for this time.

J.B. Hunt disputed that this time was compensable. First, as one driver acknowledged, the 45-minute requirement was actually prior to the end of their shift — not the beginning — so this time would’ve been captured by the timekeeping system. Separately, because the “waiting” time the drivers claim as working time was never accurately reflected on timekeeping as required by J.B. Hunt’s policy, and no other evidence suggests J.B. Hunt knew or should have known that the waiting time was off the clock, it shouldn’t be compensable.

California law allows employees to claim compensation for off-the-clock work where the employee can show:

• They performed work for which they weren’t compensated;
• The employer knew or should have known that the employee did that work; and
• The employer chose not to pay for the time.

While employees are clocked out, it is presumed that they are not working. Employees may rebut that presumption with other evidence.

The Ninth Circuit found that the drivers produced some evidence that would suggest they performed off-the-clock work between the requirement to return to the yard 45 minutes before the end of the shift and waiting for required paperwork. However, the drivers failed to produce evidence that met the second element of compensated off-the-clock work. J.B Hunt required drivers to clock in at the start and end of their shift. The drivers didn’t produce any other evidence to suggest that, at a minimum, J.B. Hunt should’ve known that work was off the clock in light of this policy. Therefore, the drivers can’t claim compensation for the off-the-clock work they may have performed.

Because the drivers’ wage statement claim was derivative of the unpaid hours claim and requires that the employer’s failure to provide accurate wage statements was knowing and intentional, it also fails for the same reason. In other words, because J.B. Hunt didn’t know or should have known there was uncompensated time, they also didn’t know or should have known this created inaccurate wage statements.

Reasonable Cell Phone Expense Reimbursement

The drivers had one wage and hour claim that was allowed to proceed to trial — they weren’t reimbursed for their personal cell phone use for business purposes, which was related to clocking in and out on cell phones instead of using the provided timekeeping system. A jury found in J.B. Hunt’s favor on this claim. On appeal, most of the drivers’ issues were around evidentiary rulings and jury instructions provided to the jury. For employers, the greatest lesson is from the discussion on the Cochran instruction.

California Labor Code section 2802 requires employers to reimburse employees for necessary expenditures or losses in the performance of their job duties or at the direction of the employer. In Cochran v. Schwan Home Service, Inc., 228 Cal.App.4th 1140 (2014), the California Court of Appeal held that employers must reimburse a reasonable percentage of an employee’s personal cell phone bill if that personal cell phone was required for business purposes.

The drivers in this case attempted to instruct the jury that Cochran required employers to reimburse a reasonable percentage of the employee’s cell phone bill regardless of whether the actual expense is such a small amount. The Ninth Circuit agreed with the trial court that this instruction is improper because it fails to address the mandatory nature of the expense. In other words, if an employee chooses to use their personal cell phone — but that use isn’t required — it’s not reimbursable under Labor Code section 2802.

Because the drivers’ use wasn’t necessary but instead convenient for them instead of using the provided timekeeping system, the expenses are not reimbursable.

Employer Takeaways

This case offers a few employer takeaways:

• Piece-rate compensation can be an effective way to encourage efficiency and productivity with certain types of nonexempt workers. However, it is very complicated to maintain a compliant piece-rate compensation system. All employers either using or considering such a system need to consult with legal counsel to ensure compliance.
• While J.B. Hunt successfully defended the off-the-clock and derivative wage statement claims, many other employers are not so fortunate. A key component to off-the-clock claims is knowledge. If an employer knows that they are sending emails or calling after hours to a nonexempt employee, they at least may have constructive knowledge that the employee needs to be compensated — especially if they respond. Have clear timekeeping policies and instruct nonexempt employees that even if they receive communications after hours, they should not respond to them.
• Claims for unpaid expense reimbursements, especially for utilities like personal cell phone and internet, continue to rise as personal and business use of those utilities mix now more than ever. A clear policy and statement as to whether the personal use of a cell phone or internet service is required will help employers evaluate whether the employee needs to be reimbursed for those expenses.