Have a Piece Rate Worker? Know the Compensation Rules

A piece rate pay system, or piecework pay, is a compensation strategy that employers use to motivate employees to work harder and faster. Unfortunately, many employers who use piecework pay do not understand that federal minimum wage requirements still require employees to track time for potential overtime wages due. 

Here are the key items you need to know about implementing a piecework system. 

Piecework define

Piece rate pay (also known as piecework) evolved during the Industrial Revolution where businesses had factory workers paid for each job or unit they created. Hence, when you compensate employees by piece rate, workers are paid based on number of units produced rather than hourly wages. The more pieces an employee produces, the more they earn.  

Advantages of a piece rate worker 

A piecework system provides many advantages for employers and employees.  

Any job with a repetitive task can quickly get mundane and boring, so implementing piecework pay can spark motivation to work harder and faster. Workers end up making more money for their efficiency, and employers benefit from a heftier bottom line for completed projects.  

Paying piece rate offers flexibility for employees to work at their own pace outside of the company’s daily or weekly quotas, which can be an attractive benefit particularly for high producers. It also omits a lot of non-productive time because employees are incentivized for increased output work. 

One of the most attractive benefits for piecework pay is the ability to accurately forecast the cost of labor. In a construction environment, for example, it is much easier to predict the cost at a price per unit such as a framed wall or square foot of roofing installed in contrast to a much-less-predictable working hour rate when creating bids. This also allows business owners to predictably factor in the protection of their valuable tools and equipment.

Potential issues of piecework rates 

According to the Federal Labor Standards Act (FLSA), employers must still comply with applicable minimum wage laws, overtime, and record-keeping requirements. This means time must still be tracked, employees must earn at least minimum wage for any time worked (regardless of how many pieces they completed), and overtime wages must still be paid for all time worked over 40 hours a week (Alaska, Colorado, Nevada, and California employers have daily overtime laws). 

Many states also require employees to be paid for rest and recovery periods of ten minutes after four hours of work. This means that workers must be paid additional compensation beyond their fixed pay rate or for each unit produced. See the table of minimum paid rest period requirements under state law for more information about rest and recovery breaks. 

Beyond administrative requirements, there are also concerns of quantity over quality. Piecework pay can often shift employees’ mindsets to work faster than they should, ignore safety issues, neglect proper maintenance on equipment, or cut corners to finish too quickly. In other words, this type of payment may not be ideal for every situation. 

How to calculate piece rate 

Calculating pay for a piece rate system starts by calculating each employee's average hourly rate or “effective rate” for that week.  

1. Calculate the Effective Rate

The effective rate is calculated by dividing the total amount earned by the number of hours worked. 

Effective rate = total $$ earned/number of hours worked 

2. Determine whether the Effective Rate meets applicable minimum wage standards

If the average hourly rate determined is less than the applicable minimum wage, the employer will need to pay additional compensation to make up the difference. For example, let’s say a worker is paid $40 for each large drainage pipe he installs. In one week, the employee installs 15 pipes in 40 hours, making $600 for the week. But is that sufficient? 

Effective rate = $600/40 hours = $15.00/hour 

Since $15.00/hour exceeds the worker's local minimum wage, the effective rate is what the employee will earn, no adjustments necessary.  

3. Boost pay to meet minimum wage requirements, where needed

If the worker is only able to produce 7 pipes in 40 hours, his total pay for the week would be $280. 

Effective rate = $280/40 = $7.00/hour 

If minimum wage is $7.25, the employer will need to boost the employee's set amount. In this case, that would be at least a minimum of $.25 for each hour worked. 

$.25 X 40 = $10.00 

Instead of receiving $280 for the week, the employee's paycheck would be $290.00, which is the equivalent of the area's minimum wage. 

Calculating piece work pay when an employee works overtime 

When piece work employees have more than 40 hours per week (Alaska, Colorado, Nevada, and California employers have daily overtime laws), their total compensation for the workweek must include time and a half for additional time worked. There are various methods for calculating overtime hours for piece rate pay. 

Option 1 for calculating piecework pay overtime 

Let’s say that this same employee works 45 hours and installed 10 pipes in one week. His piece rate would be $400 (10 pipes x $40/pipe), but this is for 45 hours of work. So, his effective rate is calculated as follows: 

Effective rate = $400/45 = $8.89 per hour 

Now the employer needs to calculate overtime pay for the 5 extra hours worked. 

Overtime compensation = 1/2 (hrs more than 40 X effective rate of pay) 

Overtime compensation = 1/2 (5 hrs X $8.89/hour) = $22.23 

Total compensation for the employee's paycheck for that period would be $400 + $22.23 or $423.00. 

Option 2 for calculating piecework pay overtime 

Another option for calculating overtime hours is paying employees time and a half for number of units produced during overtime, but this arrangement must be decided in advance of the actual overtime work.  

In our example, this means the employee would be paid $60 for each pipe installed during overtime rather than the normal $40/pipe ($40 * 1.5 = $60). If the employee installs two pipes during overtime, he will earn $120 rather than his regular rate of $80. 

Recommendations for piece work pay 

If you have the right business environment and staff to pay piece rate, it can be an effective way to promote and reward productivity. Just be sure to do the following: 

Maintain accurate time keeping records 

• Despite paying piece rates, you must keep track of all time worked to comply with the FLSA. This will help ensure employees are paid correctly and provide proof of eligibility for benefits. 

Submit total hours to your Stratus HR payroll professional  

• Our certified experts will help ensure your overtime premium has been calculated correctly for your employees. 

Some employers choose to pay employees the minimum wage rate for all hours worked, then pay a piece work premium at a lower rate to account for hours being paid at minimum wage. While this blends their overtime rate by hours paid and the additional non-discretionary pay, it ensures compliance with the FLSA compensation requirements. 

What if we have always paid piece rate but have never tracked hours? 

If you have been paying piece work for years and have never tracked time, start tracking now. Working hours will not affect piece rate pay when employees work less than 40/week (Alaska, Colorado, Nevada, and California employers have daily overtime laws) AND they average at least minimum wage for the week. But tracking hours may help you avoid legal battles stemming from workers claiming they should have been paid more than they received. 

Need help with piecework pay? 

Compensating on a piece rate basis allows employees to have more control over their earnings with less idle time and higher production. But the administrative side may feel overwhelming for some businesses. 

Let our team of certified experts at Stratus HR help with any concerns you may have about piecework pay, worker output, agricultural work, paying salary with piece rate, or any other questions you may have about how to pay employees. Not a current Stratus HR client? Book a free consultation and our team will contact you shortly.