The Ins and Outs of Paying Piece Rate

When employers decide they want to pay workers by piece rate (also known as piecework), they’re referring to pay based on number of units or pieces created rather than the number of hours worked. In other words, the more "pieces" an employee produces, the more the employee is paid. Sounds like an easy concept, right? Unfortunately, it’s a little more complicated for employers.

Why employers would want to pay piece rate

Jobs with repetitive tasks can quickly seem mundane and boring, so paying employees by piece rate can spark motivation to work harder and faster – all with less supervision. Workers end up making more money for their efficient work, and employers benefit from a heftier bottom line for completed projects. Paying piece rate also provides 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.

Perhaps one of the most attractive benefits for employers to pay piece rate is the ability to accurately forecast labor costs. In a construction environment, for example, it’s much easier to predict the labor costs at a price per framed wall in contrast to a much-less-predictable hourly rate when creating bids.

Pitfalls of paying piece rate

According to the FLSA, employers must still comply with state and federal 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, or 8 hours a day in California. (See “Calculating overtime for piece rate.”)

Beyond administrative requirements, there are also concerns of quantity over quality. Paying piece rate can often shift employees’ mindsets to work faster than they should, ignore safety issues, neglect proper maintenance on equipment, and/or cut corners to finish too quickly. In other words, it may not be the best pay arrangement for every employee (or employer).

How to calculate piece rate

Calculating pay for piece rate workers starts by calculating each employee's “effective rate” for that week. Effective rate is calculated by dividing the total earned by the number of hours worked.

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

If the effective rate doesn't equal or exceed minimum wage, the employer will need to pay additional money 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 $600.00 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. However, if the worker is only able to install 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 make up the difference -- in this case, $.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 -- the equivalent of the area's minimum wage.

Calculating piece-rate when an employee works overtime

Things get trickier when overtime is involved. When employees work more than 40 hours a week (or 8 hours a day in California), they must be paid time and a half for additional hours worked.

Option 1:

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 pay = 1/2 (hours in excess of 40 * effective rate of pay)

Overtime pay = 1/2 (5 hours * $8.89/hour) = $22.23

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

Option 2:

Another option for calculating overtime is paying employees time and a half for all pieces made during overtime, but this arrangement must be decided in advance of the actual overtime work. In our example, this means our employee would be paid $60 for each pipe installed during overtime hours rather than the normal $40/pipe ($40 * 1.5 = $60). If the employee installs two pipes during overtime, he earns $120 rather than his regular rate of $80.

Advice for paying piece rate

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

1. Maintain accurate time keeping records of all hours worked to comply with the FLSA, ensure employees are being paid correctly, and to provide proof of eligibility for benefits.
2. Submit those hours to your Stratus.hr payroll professional who will verify everything has been calculated correctly.

If you have been paying by piece rate for years and have never tracked time, start tracking now. Hours will not affect pay in the event an employee works less than 40 hours a week (8 hours/day in California) AND the employee averages at least minimum wage for the week. But tracking hours may help you avoid legal battles stemming from employees claiming they should have been paid more than they received.

Note: California has more complicated laws governing employee pay and piece rate. Please contact your HR expert if you wish to pay an employee piece rate in the state of California.