What is piece rate?
John owns a salon and pays each stylist a flat amount for each appointment they have, in addition to any tips they receive.
Mavis has a small company that assembles gift baskets. Employees are paid for every basket they make in a workday.
Tina is a caregiver and is paid a set amount for each client she visits.
Martin drives a short-distance moving van and his employer pays him a flat rate per trip.
All of these are considered types of “piece rate” compensation. Piece-rate is basically any compensation plan that pays “per item” (per appointment, per basket, per client) in lieu of, or in addition to, a pay-per-hour structure. Some employers use it a way to incentivize employees as it allows them the potential to earn more than they could with a standard hourly rate. It is, in fact, a legal way to pay employees.
What could go wrong?
It just so happens that while piece rate is LEGAL, it comes with a lot of rules and regulations. So many, in fact, that some companies have opted to stick with an hourly rate simply to avoid issues. Lawsuits for improperly compensating under a piece-rate structure have resulted in huge settlements.
Some of the regulations to consider:
- Minimum wage. Minimum wage (federal, state or locality) still applies in most cases. This means that even though employees are earning on a “per item” basis, employers still need to ensure that their employees are earning at least minimum wage for each hour they are working so the need to track time via a timesheet or other timecard system is still necessary for the employer.
If employees are not earning at least minimum wage for each hour worked, you, as the employer, will need to make up the difference each week.
- Overtime. Piece-rate employees are still eligible for federal and/or state overtime and all compensation earned during the workweek needs to be considered when calculating the regular rate of pay, which will dictate the overtime rate for a workweek.
Overtime Pay Requirements of the FLSA
Keep in mind, it is always recommended that employers seek a legal professional’s guidance when determining the correct way to calculate the regular rate of pay when piece rate is involved.
- Sick Leave. Any local or state-mandated sick leave program will likely have its own rules about how piece-rate employees must be compensated for any sick leave they take.
- Meal and rest periods. In states where meal and rest periods are required, they also apply to most piece-rate employees. Documentation of when the meal periods are taken, and how long the meal periods were, will be a key part of the recordkeeping that will demonstrate compliance with these laws.
- Additional State regulations. In California, piece rate compensation also comes with additional requirements when it comes to pay statements. Employers must not only comply with state and local minimum wage, but also need to compensate for rest and recovery periods, as well as downtime, separately on pay statements.
So, what does all of this mean?
In cases of wage and hour claims, compensation plans outside of a standard hourly rate for all hours worked fall under close scrutiny to ensure employers are complying with all state and federal laws.
While piece rate pay IS a permissible way to pay employees, it is recommended that employers proceed with caution and consult with a state labor law attorney to ensure that they are aware of the potential pitfalls and regulations associated with such a pay structure.
This article does not constitute legal advice and there are subtle variations in employment law as it pertains to this topic, depending on where your business operates. It is strongly suggested that you seek consultation or legal counsel before making decisions about policies.