California’s Piece-Rate Compensation Law Survives Court Challenge
On January 4, 2019, the California Court of Appeal rejected a request to declare the state’s piece-rate compensation law unconstitutionally vague. The 2016 law, codified as Section 226.2 of the California Labor Code, requires employers to compensate piece-rate employees separately for so-called “nonproductive” work time that is not directly related to the activity being compensated on a piece-rate basis.
The statute requires separate compensation for rest and recovery periods mandated by state law, as well as “other nonproductive time.” Nisei Farmers League brought suit seeking to have the statute declared unconstitutional, arguing the phrase “other nonproductive time” is unconstitutionally vague because it doesn’t say whether such activities as “traveling between work sites, attending meetings, doing warm-up calisthenics, putting on protective gear, sharpening tools, waiting for additional equipment, or waiting for weather to change” are “nonproductive” time within the meaning of the statute. The Court of Appeal rejected the argument, finding the phrase in question was expressly defined by the statute as time under the employer’s control not directly related to the activity being compensated on a piece-rate basis, and there was no constitutional requirement to define precisely what activities fall within the definition.
The 2016 legislation is a codification of earlier appellate court decisions holding that piece-rate workers must be separately compensated for rest breaks. A February 2017 appellate decision reached a similar conclusion as to the nonproductive work time of employees classified as exempt from overtime under the commissioned employee (a/k/a “inside sales”) exemption. (Employees classified as exempt under the “outside sales” exemption are not subject to minimum wage, overtime, or meal/rest break requirements.) All employers with piece-rate and/or inside commissioned sales employees in California should take immediate steps to ensure they separately compensate these employees for all rest breaks and other nonproductive time.
The case is Nisei Farmers League v. California Labor & Workforce Development Agency, No. F075102 (Cal. App. January 4, 2019.)
Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
Update on Executive and Employee Compensation in Government Contracts
The Government is in constant pursuit of later for ways to save money and, for many in the government, there is no better place to do that than on the backs of contractor that serve it. A popular target with the current Administration is the area of executive compensation. It seems not enough that shareholders keep this in check. The government also feels it need inject itself in this market-based equation with hard and fast rules. It has even seen fit on occasion to create rules where there are none, using the Defense Contract Audit Agency (DCAA) as its sword. With respect to rules, there exists the prospect of political restraint. Also, where the Government oversteps its bounds, there are Courts that sometimes rein it in.
On the rulemaking side, Congress amended 10 USC § 2324 this past year to provide that the cap on allowable executive compensation reimbursed on cost-based contracts (currently $693,951 annually, including wages, salary, bonuses and deferred compensation) now applies to “any contractor employee.” It applies not only to prime contractors but also to subcontractors at any level. This does not mean that contractors are limited in what they can pay employees; rather, it simply serves as a limit on what can be reimbursed on a government contract. Accord 48 CFR 31.205-6(p). Additionally, allowable amounts are also subject to the requirements that the compensation be “reasonable and allocable.” This reasonableness requirement is where DCAA has recently been chastised for its views.
In Appeal of J.F. Taylor, Inc., ASBCA No. 56105 (January 18, 2012), the Board rejected the government’s challenge to a contractor’s executive compensation model that considered both the revenues of the whole company and its superior performance, as anyone with experience in the private sector would expect. The government instead tried to rely upon DCAA’s approach that simply mechanically applied a median executive compensation number loosely based upon a market survey unrelated to the contractor at issue. In its decision, the Board accepted the contractor’s unrebutted expert testimony that “the methodology used by DCAA was fatally flawed statistically and therefore unreasonable.” The Board also went on to reject the DCAA expert, saying “the government effort to support its own methodology was supplanted by an expert witness of questionable judgment.” That is harsh by any standard, but appropriate given the circumstances.
What we take from this is that Executive Compensation Reviews (ECRs) by DCAA will continue, and that they may morph into wider reviews. However, the silver lining is that Courts and Boards seem to willing to scrutinize government positions on compensation that do not make sense; this may give the Government pause. It is often a battle of the experts, and this writer can personally vouch for the expert used by J.F. Taylor in its case, namely Jimmy Jackson (having seen his excellent work myself). It remains to be seen whether the Government will appeal J. F. Taylor; they have until May 17, 2012 to do so. Regardless, the Government must deal with DCAA’s methodology on ECR reviews which, at present, is considered fatally flawed. We recommend that any contractor undergoing an ECR seek competent counsel for assistance. It could make a big difference to your bottom line!
Bryant S. Banes, Managing Shareholder, Neel, Hooper & Banes, P.C., Houston, Texas (May 9, 2012)