Under federal and state laws, employers must pay employees no less than the federal or state minimum wage — whichever is higher. Another option is to pay by the piece, also called the piecework pay system.
Piecework pay is compensation on a per-unit basis. Employees are paid according to the number of units/items produced instead of how much time they spend working.
For example, an employer can choose to pay mechanics a fixed rate for each vehicle they repair instead of paying an hourly rate.
Some piece-rate employees earn different rates for different jobs. For instance, mechanics may get paid one rate for brake jobs and another rate for tune-ups.
Piecework is most commonly found in production-heavy environments, such as:
Employers must comply with federal and state minimum wage, overtime and recordkeeping requirements when paying employees on a piece-rate basis.
Let's assume an employee earns $20/unit and completes 20 units during a 40-hour workweek:
Although $10/hour satisfies the federal minimum wage requirement of $7.25/hour, depending on your location, it may or may not meet the state's minimum wage threshold. For example, the minimum wage in Washington is $12/hour and in Colorado it's $11.10/hour. Also, some cities have their own minimum wage.
If the employee's piece-rate pay is less than the required minimum wage, the employer must pay the difference — and this difference will vary based on how many units the employee produces each week.
In addition, piece-rate employees who work more than 40 hours in a week must receive overtime. For this reason, it's vital that employers keep accurate records of piece-rate employees' work hours.
Employers should also stay abreast of state laws impacting piece-rate employees. For instance, employers in California must pay piece-rate employees for rest, recovery and other nonproductive periods even if their take-home pay exceeds the minimum wage.
A piece-rate pay system may incentivize employees to work more efficiently — as their compensation is driven by output. Depending on the situation, employees may earn more in less time on a piece-rate basis than if they are paid by the hour.
On the downside, piece-rate employees may put quantity over quality to increase their take-home pay. Further, it can be challenging for employers to design, implement and maintain a piecework pay model that is fair, consistent and legal. So, although a piecework system can benefit both employers and workers, it's best to get professional advice on any system.