Payroll in Practice: 1.22.2024

Question: An employer wishes to establish a piecework basis for compensating certain workers. How does a piece work system handle minimum wage and overtime compensation requirements?

Answer: As with any other basis for determining nonexempt employee compensation, a piece-work system must operate in compliance with the minimum wage and overtime compensation requirements of the Fair Labor Standards Act and related regulations. Compliance involves three basic concepts: the workweek, the maximum hours provision, and the regular rate of pay.

The workweek is defined as 168 consecutive hours. It need not correspond to the calendar week but must have a consistent start with respect to a given employee or group of employees. When one workweek ends, the next one begins. To determine worker pay, it is necessary to determine the hours worked and compensation earned for the workweek. Each workweek stands alone, regardless of payment period and compensation basis.

The maximum hours provision sets the point in the workweek at which an employee becomes entitled to overtime compensation. The current maximum under federal law is 40 hours, but it can be less under state or local law, by agreement, or for work on special days.

The regular rate of pay is an hourly rate drawn from the employment agreement. It includes all compensation except statutory exclusions and is a mathematical computation rather than a specified rate. Generally, it is computed by dividing the employee’s total compensation for the workweek by the number of hours the employee worked during the workweek. The overtime rate of pay is at least one and one-half times the employee’s regular rate of pay.

Under a piecework system, employee compensation varies with the amount of production rather than the number of hours worked. Accurate recordkeeping is crucial to show compliance with the FLSA minimum wage and overtime rules. An employer must keep records of hours worked even if the compensation is determined on some other basis such as commission, piece rate, day rate, or job rate.

Example 1: During a workweek, a worker produces 1,000 pieces in 20 hours at 30 cents per piece. Total pay for the week is $300 (1,000 X $0.30). The regular hourly rate of pay is $15 an hour ($300/20 hours). Time records establish minimum wage and maximum hours compliance.

Example 2: During a workweek, a worker produces 2,000 pieces in 45 hours at 30 cents per piece. Regular pay for the week is $600 (2,000 X $0.30) and the regular hourly rate is $13.33 ($600 / 45 hours). Hourly overtime premium is $6.67 ($13.33 / 2) and total overtime compensation is $33.35 ($6.67 x 5 hours). The total pay for the workweek is $633.35 ($600 + $33.35).

Waiting time may be paid at a separate rate but is also included in total compensation.

Example 3: During a workweek a worker produces 500 pieces in 46 hours at $1.20 per piece and spends four hours of waiting time at $7.50 per hour. The straight time pay is $630 (500 x $1.20 + $7.50 x 4 hours). Regular rate of pay is $12.60 ($630 / 50 hours). The overtime premium is $63 ($12.60 x 0.5 x 10 hours). Gross pay is $693.

The agreement may provide for a piece rate with a minimum hourly guarantee.

Example 4: During a workweek a worker produces 600 pieces in 48 hours at $1 per piece with a $13 guaranteed minimum hourly rate. The piece rate yields $600 (600 x $1). The regular rate of pay is $12.50 (600 / 48 hours). The regular pay at the minimum hourly guarantee is $624 ($13 x 48 hours). Overtime premium is $52 ($13 x 0.05 x 8 hrs.). Gross pay is $676 ($624 + $52).

Under an allowable exception, overtime pay may be computed as a piece rate. This special method is intended to simplify the overtime computation for piece rates where there are multiple hourly or piece rates, or some other combination of rates. Piece rates for work performed during overtime hours must be at least 1.5 times the regular piece rates with rates properly applied to the pieces produced.

All rates must be bona fide rates, the average regular rate must be at least minimum wage and the number of hours paid at overtime rates must be at least the number of overtime hours worked. The employer and employee must agree to use the piece-rate overtime method before the work is performed. The gross pay under the exception must be substantially the same as gross pay under the general method.

Example 4: 500 pieces at $1.00 produced in 40 hours, 70 pieces at $1.50 produced in six overtime hours. Under the allowable exception, regular pay is $500 (500 X $1). Overtime pay is $105 (70 X 1.5). Gross pay is $605 ($500 + $105). Under the general method, regular pay is $570 (570 x $1), the regular rate of pay is $12.39 ($570 / 46 hours), the overtime premium is $37.17 ($12.39 x 0.5 X 6 hours), and gross pay is $607.17 ($570 + $37.17).

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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