Piece-rate pay is a system in which an employer pays its employees based on the number of units (or pieces) that they complete, as opposed to paying a salary or fixed hourly wage. While piece-rate pay is legal, if you are using this payment model in your organization, you’ll still want to make sure that your employees are being paid minimum wage. But what if this is the first time you’re getting familiar with paying employees this way?
In this guide for HR professionals and small businesses, we’ll explain what piece-rate pay is, provide examples of how it can be used, and discuss some of the potential pros and cons to consider.
What is piece-rate pay?
Simply put, piece-rate pay means that an employee is paid for the number of pieces that they complete for their employer. This could take different forms, such as the number of procedures administered by a nurse, the number of pipes a pipe layer installs, the number of baskets of fruit a farm worker picks, or even the number of brochures a graphic designer creates. The higher the quantity the person completes, the more they are paid.
This differs from a per-hour pay rate or a salary and focuses chiefly on the number of units created, produced, or completed. Piece-rate work is more common in manufacturing, construction, agriculture, photography, and other fine arts.
Now that we better understand the purpose behind this payment model, let’s find out why some employers use it.
Advantages of piece-rate pay
There are certain benefits of piece-rate pay that both employers and employees take advantage of.
- Increased productivity: When workers are paid for each item they complete, it can encourage productivity and efficiency. While workers who receive hourly pay or who are paid a flat salary might be tempted to take more breaks or work at a more leisurely pace, those who receive piece-rate pay have an incentive to produce as much output as possible.
- Enhanced motivation: Likewise, piece rates can be motivating for employees who appreciate seeing payment for each piece of work they create. Many employees are motivated by pay to complete as much work as possible in a given time.
Employers still need to pay a minimum wage, but this can be a cost-efficient model for small businesses with strict budgets. It can also spark creativity and ingenuity as employees devise better and smarter ways of doing things without the need for much supervision.
With some reasons why companies choose this payment method in mind, let’s find out why some employers avoid paying workers this way.
Disadvantages of piece-rate pay
On the flip side, piece-rate pay also has its share of potential disadvantages.
- Quality control challenges: Workers are often motivated more by quantity than quality in this type of pay system. Fast-paced work can be hard to maintain and quality control challenges are a common issue. This payment model also places a fair amount of pressure on employees, which can be difficult for some to manage.
- Payroll complexity: If your company pays minimum wage and occasional overtime plus payment per piece, running payroll can be more challenging than traditional hourly or salary calculations. It could make sense to work with a company that provides small business payroll to help your organization accurately track and pay for piece-rate vs. regular hours.
Other potential disadvantages can include challenges with setting an acceptable price per piece, productivity downturns when employees are sick or injured, and challenges with future workforce planning.
Legal considerations
There are several important legal considerations that companies should keep in mind.
Compliance with minimum wage laws
Even if piece-rate workers have low output, they must be paid minimum wage. Companies of all sizes need to be sure they are following their local minimum wage laws and piece-rate pay plans.
Overtime regulations
According to the Fair Labor Standards Act, workers being compensated using piece-rate pay must also be paid overtime at time-and-a-half their regular rate when applicable. Calculating overtime for starts when nonexempt or piece-rate pay employees work more than 40 hours in a given work week. Employees should receive both their piece-rate pay and their overtime pay in this scenario.
Break time compensation
In addition to minimum wage laws and overtime regulations, many states require employees to be paid for “rest and recovery periods” of at least 10 minutes for every four hours of work. These laws vary from state to state.
Navigating piece-rate compensation in different states
Employers must comply with state laws when it comes to employee compensation.
In California, employers are banned from paying piece-rate pay to workers in the garment industry, but this payment option is allowed in other industries. In addition, some states have minimum paid rest period requirements that must be adhered to. In Minnesota, for instance, rest periods of less than 20 minutes cannot be deducted from total hours worked, and in Washington state, employees cannot be required to work more than three hours without being given a rest period.
HR professionals in each state should take a closer look at local laws where they do business to make sure that piece-rate compensation is both fair and accurate.
Final thoughts: Is piece-rate pay the right choice for your organization?
Piece-rate compensation can be a pay model that makes business sense for repetitive work and organizations seeking to improve productivity. However, the piece-rate system can also take a toll on your employees and lead to a reduced focus on quality with the greater goal of quantity. Naturally, every method of worker payment has its pluses and minuses, so it is ultimately up to your organization to determine your goals and how piece-rate pay might play into them.
We also have resources if you are trying to understand the right payroll processing system that makes the most sense for your goals. Best of luck growing your business and our team is here to help!
