Appellate Court Affirms Car Dealership’s “Flag Bonus” System
In a recent November 2025 decision seen as a win for dealerships and other employers, a California appellate court in Mora v. C.E. Enterprises, Inc. upheld an incentive-based compensation plan supporting hybrid hourly and bonus structures.
Appellants and former employees Gustavo Mora and Mohammad Hanif worked as service technicians at First Honda auto dealership. Appellants sued First Honda for alleged violations of the Labor Code and the Unfair Competition Law, and also asserted a claim on behalf of themselves and other First Honda employees under the Private Attorney General Act (PAGA). The trial court entered judgment in First Honda’s favor on all claims.
Mora and Hanif appealed contending the lower court erred in finding they failed to prove that First Honda’s compensation plan for service technicians violated the “no borrowing rule” as provided in the 2013 case of Gonzalez v. Downtown LA Motors and failed to comply with Labor Code section 226.2. They also claimed they presented substantial and undisputed evidence that they were not fully compensated for all hours worked, and that the court erred in entering judgment in First Honda’s favor on their PAGA claim. The appellate court affirmed the trial court’s decision.
The Dealership’s pay plan: Effective December 1, 2014, First Honda adopted an hourly pay plan for service technicians that paid the technicians at least the applicable minimum and overtime wages for all hours recorded on the timekeeping system. Because service technicians were required to use their own tools, they were paid double the minimum wage for all hours recorded. Prior to First Honda’s adoption of the hourly pay plan, service technicians were paid on a piece-rate basis based on the “flag” hours they recorded for completing service orders. However, First Honda’s hourly pay plan was adopted with guidance from the California New Car Dealers Association, after the piece-rate pay plan was found invalid under Gonzalez.
First Honda’s hourly pay plan gave service technicians the opportunity to take a one-hour meal period along with rest periods for which they do not clock out for and for which they are compensated at their hourly rates of pay, i.e., double the minimum wage.
In addition to paying double the minimum wage, First Honda’s hourly pay plan also provided service technicians the opportunity to earn “flag bonus pay” if the flag hours they separately record, multiplied by the dollar amount of their assigned flag rate, exceeds their regular and overtime hourly earnings.
The Dealership did not violate the “no borrowing rule”: In Gonzalez, the court held that an employer’s piece-rate system of paying automotive service technicians more than minimum wage for designated flag hours, but not making separate payments for non-flag hours, violated the minimum wage requirements, even though the technicians earned at least minimum wage when the employer averaged the flag and non flag hours; the employer would supplement the technicians’ pay if the flag hour pay fell short of the “minimum wage floor.”
According to Gonzalez, “a piece rate basis . . . differs from an hourly rate method in that technicians are paid primarily on the basis of repair tasks completed.” Flag hours are fixed amounts of time assigned for completing service tasks “and are intended to correspond to the actual amount of time a technician would need to perform the task.”
In reaching this conclusion the court adopted the reasoning of Armenta v. Osmose, Inc., in which the court held that hourly employees must be paid the minimum wage for each hour worked, such that an employer violates the minimum wage law if it averages employees’ hours in a given pay period to compute its minimum wage obligation.
The Mora court determined that the trial court correctly found that First Honda’s hourly pay plan did not violate the no borrowing rule. The hourly pay plan was plainly distinguishable from the compensation plan in Gonzalez, in which the employer averaged the piece-rate payments made to their employees in an effort to meet the minimum wage requirements. Unlike the pay plan in Gonzalez, the hourly pay plan actually pays each employee for every hour recorded on the biometric time clock and merely provided the opportunity to earn “flag bonus pay” as a reward for efficiency.
The Dealership did not violate Labor Code section 226.2: In looking at the appellants’ claim that First Honda’s hourly pay plan violated section 226.2, the court found this argument to be unsuccessful as well. Employees mere complaint that they could not flag any hours during unproductive time when they were not working on cars did not prove that they were ever paid less than double the minimum wage or any overtime wages for all the time recorded on their biometric time cards, which included any and all “unproductive time when they were not working on cars[.]” Nor did they provide any evidence that they (or any other service technicians) were ever deprived of any flag bonus pay to which they were entitled under the hourly pay plan.
The court dismissed the PAGA claim: The employees failed to provide adequate evidence to support their claims and the notice they sent to the Labor and Workforce Development Agency was insufficient to cover the specific violations alleged at trial, providing an independent basis for affirming the judgment in favor of the employer.
Summary: The Mora court found that the dealership's compensation structure, which included a guaranteed hourly wage plus a "flag bonus" for completing tasks faster than average, was permissible. In addition, the bonus was a true incentive, not a way to make up for non-productive time or rest breaks, thus not violating the "no borrowing rule" established in Gonzalez.
If you have any questions about your workplace’s compensation structures, please contact the experts at Rosasco Law Group for all of your workplace needs – we are here to help!
