The Legality of Flat-Rate Pay

July 1, 2015
Two years after a California law bans flat-rate pay, a lawsuit against Caliber shows the state is struggling to meet requiremen

“Gasping” and “struggling” were the terms Mary Kemnitz used to describe it. As the immediate past president of the Automotive Service Councils of California, Kemnitz has watched as shops have struggled to realign with new standards for employee pay in her state. 

The latest example came from the collision repair industry: A lawsuit involving a major auto body chain was filed in February in which a former technician at one of the company’s California locations alleges underpayment and violation of state law involving minimum wage requirements in regard to flat-rate pay.

The suit, filed Feb. 17 in Los Angeles, is still unresolved. The defendant, Caliber Collision, which has 279 shops in 13 states, did not respond to a request for comment. 

The suit grabbed headlines, but Kemnitz and others say it’s simply the most glaring—and recent—example of California repair shops, particularly mechanical and service ones, struggling to meet a state requirement that is now two years old. In 2013, a lawsuit involving technicians at an L.A. dealership shop set a precedent that drastically altered the way California collision repair businesses could pay their employees. 

In the simplest sense, the 2013 interpretation banned traditional flat-rate pay systems in the state. It forced many shops to completely overhaul their pay structures; others to re-evaluate the number of technicians they employ. And it has left employers susceptible to litigation, similar to that filed against Caliber, if their plans don’t mesh with the new restrictions. 

Two years after these new laws were put in place, the suit against Caliber could signal a lack of urgency among California repairers to meet the new requirements, and, according to some, it could provide widespread impact throughout the auto service industry. 

It could also be the boost many repair shops nationwide need to restructure outdated pay systems, Kemnitz says, and start operating like a modern business.

Perfect Storm

The technician pay structure changes imposed by the Gonzalez v. Downtown LA Motors decision instituted in 2013 affect California shops only, says San Diego–based employment attorney Cory King, who also serves as the chair of the Collision Industry Conference (CIC) human resources committee. The court’s decision was premised on statutory and case law unique to California that does not exist in other states; most others follow the Fair Labor Standards Act (FLSA).

The difference, King explains, is that federal law permits employers to meet minimum wage requirements by averaging an employee’s flat-rate pay across his or her total hours worked; e.g., if a flat-rate body tech works an eight-hour shift, as long as the tech’s effective rate (total flat-rate wages divided by total hours) averages out to be greater than the applicable minimum wage, there is no minimum wage compliance issue.

However, the Gonzalez court interpreted California law to require minimum wage to be met for each hour an employee is working; i.e., the averaging process under federal law is not allowed, and, further, the flat-rate wages are only intended to compensate the tech for the time spent actually doing flat-rate work, they are entitled to be paid at least minimum wage for all other time. If a tech is not productive for an hour—regardless of the amount of flag hours performed or total pay—they must be paid at least minimum wage for that non-productive hour. 

It was a “perfect storm to this disturbing interpretation of the law,” King says, “starting with a tech’s tenacious lawyer and a trial judge who did not understand flat-rate compensation, followed by an apathetic appellate court who rubber-stamped the trial court’s decision and the [California] Supreme Court who refused to even look at the issue. The result? A misguided decision that has led to a flood of class-action lawsuits.”

The Shift Away from Flat Rate

Industry consultant Dan Gilley of RLO Training started out as a technician, and he’s not shy about how much he enjoyed working on a production-based pay scale.

The situation at Downtown LA Motors that led to the initial 2013 decision, though, was akin to “slave labor,” Gilley says. He also wasn’t surprised to hear of a shop treating its employees this way.

Flat-rate pay, as a whole, is a “rabbit hole” of a topic, he says, as it’s “widely misunderstood and often implemented incorrectly and ineffectively.” 

“The fact is that if it’s a poorly run shop—and far too many shops are—then [traditional] flat rate doesn’t work anyway. There are too many factors that hinder it,” he says. 

Still, he says, there needs to be some sort of incentive for staff to produce.

“There are so many different variations and every situation is different, but you need to come up with a plan where everybody wins—the shop, the customer, the technician,” he says. 

Kemnitz and her husband, who co-own their Concord, Calif., shop, D&H Enterprises, pay their employees on a wage-plus-bonus system, where pay increases based on education and training incentives. (Team members get a bump in pay if they achieve 12 hours of course credit in a quarter.)

Traditional flat rate, regardless of state or federal laws, is not the future of managing a productive staff, Kemnitz says, and shops need to find new ways to motivate and properly compensate employees.

“It’s hard to imagine shops still operating this way,” she says of those in the recent lawsuits. “Your team is incredibly valuable to your business and you need to treat them that way.” 

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