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Piece-Rate Pay: Should You Do it?

A man pulling money out of his wallet

As a business owner, you have the choice to compensate your employees utilizing a number of different methods, as long as you meet federal and state law requirements. One option employers can give their workers is called “piece-rate” pay. Piece-rate compensation allows the employee to earn pay based on the units created rather than the hours they worked.  

If you’re thinking about paying your workers using a piece-rate system, here’s some things you should consider:

What is Piece-Rate Pay?

Piece-rate is a form of payment employers use to compensate their workers. Rather than paying their workers for the hours they work, they receive payment based on the number of “pieces”, or units, completed. For example, an employer of a plumbing company may elect to pay their plumbers a set rate for every customer they serve, rather than an hourly rate. 

Additionally, piece rates may vary depending on what job, task, or unit the employee is working on. That being said, employees may earn different pay rates throughout their shift, depending on the task performed, the level of complexity, the risk involved, etc. For example, a construction worker may earn $20 when they’re doing tile work, but may earn $25 when performing foundation work. 

Which Employers Give Employees Piece-Rate Pay?

Piece-rate pay structures are pay rates normally associated with freelancers and independent contractors. However, there are many industries who pay their employees using piece-rate pay. These include: 

  • Plumbing
  • Carpet Work
  • Construction
  • Auto Repair
  • Carpenter
  • Online Jobs (i.e. transcribing audio, designing, etc.)
  • Farmers

Meeting Minimum Wage Requirements

Paying employees piece-rate is acceptable, but you must ensure that you follow minimum wage guidelines. Although there are federal minimum wage requirements, you must remember that some states, and even some cities, have their own rules. If you inadvertently pay your workers less than minimum wage, you may face penalties from the Department of Labor. In order to avoid costly mistakes due to the underpayment of your workers, you’ll want to be mindful of how much you’re compensating them.

How do you meet minimum wage requirements while paying piece-rate pay? It’s fairly simple:

Let’s say that an employee earns $18 per unit and completes 30 units during a 40-hour workweek… 

  • $18/unit x 20 units= 360. This employee earned $360.00 of piece work pay. 
  • $360/40 hours= 9. The employee’s hourly rate is $9/hr. 

Although the employee makes more than the federal minimum wage (which is $7.25), the employee may still not meet minimum wage standards in their area. Remember, the minimum wage varies by state and sometimes by city, so you’ll want to double-check to ensure that their wage is high enough. If their paychecks aren’t high enough, you’ll need to make up the difference.

How Overtime Works

Just like a non-exempt employee, you must pay employees who earn piece-rate overtime after 40 hours in a week. Calculating overtime for piece-rate employees is a little more complicated because employers must find the employee’s average hourly pay over the course of the week to determine their overtime rate. Basically, you must determine their base hourly rate, multiply that total by .5, and then multiply that by the number of overtime hours they worked. 

For example, let’s say an employee worked for 50 hours and earned a total of $700 in piece pay in a week. The base salary is $14 ($700/50 hrs=$14). The employee earned 10 hours of overtime, so they earned $70 of overtime wages ($14 [base] x .5 [OT] x 10 hrs= $70).

If you are located in California, it’s a little more complicated. Visit the California government’s website to learn more about overtime options. 

What’s So Great About Piece-Rate Pay?

Piece-rate pay is oftentimes highly accepted and liked by both employers and workers. Is this a good fit for your business? Let’s find out:

  • Increased Pay: Employees earn pay based on the amount of work completed. If they create more units (or complete more tasks), the higher their wages will be.
  • More Production: As stated above, employees are paid based on the number of units they complete, which means they have more incentive to create more units (or complete more tasks).
  • Higher Flexibility: This may not be true for all types of work, but most piece-rate employees get to work when they want. This is because they’re paid on the number of units completed, rather than the time spent on the task.
  • Less Supervision: Since employees earn pay based on their output, they won’t waste time. They will be more likely to continue repetitive work without the need for supervision.

Although piece-rate pay comes with these advantages, there are some downsides. For instance, those who pay employees piece-rate pay tend to see more production, but lower quality. This is because employees are trying to produce items as quickly as they can, rather than taking their time. Perhaps if you’re thinking about implementing piece-rate pay, you’ll want to keep a close eye on the quality of your products to ensure that this makes a positive impact on your business.

If you want to carry out piece-rate pay in your business, please be mindful of their timesheets and quality of work. Piece pay can be tricky to track, and since recordkeeping is so important in helping you stay compliant, you’ll want to make sure you have a reliable way to track their time and wages., for example, is a time tracking system that uses account codes to differentiate pay rates for different jobs/tasks. It’s an incredibly organized and efficient way to monitor employees with or without piece rates.

Ready to start tracking employee time, tasks, projects, and time off? Try! It’s easy-to-use and FREE during your first payroll cycle.

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