Implementing A Compliant “Hourly Rate Based” Compensation System In California

In a recent California appellate court decision, the court upheld a trial court’s judgment in favor of Certified Tire and Service Centers (“Certified Tire”), finding the company’s “hourly rate based” compensation system for its tire technicians complied with California’s wage and hour laws.

We wanted to take this time to explain how Certified Tire’s “hourly rate based” compensation system works and how you can use a compensation system such as this for your company’. Although we will not go into all of the details surrounding the case, you can CLICK HERE to read about the interesting decision.

Our analysis begins with how Certified Tire paid their technicians, based on our understanding of the case, which is detailed below:

  • All technicians were paid the required minimum wage.
  • All technicians were paid for their rest periods and all work that was performed.
  • Technicians that performed certain types of work that the company wanted them to perform for customers, received “production dollars.”
  • Technicians earned a “tech rate” between 28%-34% of these productions dollars based on achieving certification and/or testing to reach certain levels of proficiently in the company.
  • These production dollars were then calculated using a formula:
    • (Production Dollars (in pay period) * 95% * tech rate %) / # of hours (in pay period)
    • This calculation formula became regular rate of pay and there were NO LIMITS on how high the regular pay could be.  The employee would get the higher of the minimum wage or the new rate that was calculated for all the hours worked including overtime in that pay period.

So using the above formula, let’s look at an example of how this unique compensation system works:

  • Joe Smith is a technician earning the basic minimum wage of $15.00.
  • Joe Smith’s certifications and qualifications within the company earn him a “tech rate” of 30%.
  • The current pay period consists of two (2) 40 hour work weeks.  Therefore the current pay period has 80 hours.
  • Joe Smith worked 88 hours for that pay period (80 hours regular and 8 overtime).
  • Joe Smith earned $10,000 “Production Dollars”.
  • Using the formula by certified tires, the regular rate was:
    • (10,000 * 95% * 30%) / 80 = $35.62.
    • Based on this calculation we would use this new regular rate of $35.62 instead of his minimum wage of $15.
  • Therefore his new gross pay before taxes for this pay period would be $35.62*80 + 35.62*1.5*8 = $3,277.04.
  • If he was at $15.00, he would have only earned $15.00*80 + 15.00*1.5*8 = $1,380.00.

This hourly based compensation system is an example of how companies can encourage workers to perform certain tasks that they might avoid in the course of their job in order to get a better rate of pay without having to do commission based or bonus based systems.

For any questions about implementing polices and how YourVirtualHR, Inc. can help,  please give us a call at Toll Free 1-562-888-0126 or email sales@yourvirtualhr.com for more information.