Employer and employee discussing hour and wages

How Is Overtime Calculated for Employees Who Are Paid on a Piece Rate Basis?

Piece-rate pay is still a common practice in some industries. Rather than hourly or salary pay, piece-rate workers are paid on the number of units produced within a set period of time. While this sounds straightforward, calculating rates of pay and overtime for piece-rate workers can be complicated. The best way for employers to understand their legal obligations and avoid wage violations is to consult with an experienced wage and hour lawyer. 

How does piece-rate pay work?

Piece-rate pay is typically calculated by a pay per unit of work method: the number of finished units is multiplied by the rate of pay to arrive at the piece rate total for the pay period. The piecework approach is designed to incentivize productivity which can be beneficial to both the employer and the employee. Moreover, piece-rate pay also ensures quality control because this system typically doesn’t cover flawed or spoiled units.

Are piece-rate workers entitled to overtime pay?

Piece-rate workers must be paid at least the minimum wage; they are also considered non-exempt employees under the Fair Labor Standards Act (FLSA) and must be paid overtime. According to the FLSA, the regular rate for workers paid on a piece-piece rate basis is calculated by totaling earnings from all sources, including production bonus and waiting time.

Given that piece-rate workers are not paid on an hourly basis, calculating overtime pay can be tricky. In addition, piece-rate workers also take part in productive and nonproductive work.  However, the U.S. Department of Labor (DOL) issued an opinion letter in November 2021, clarifying how overtime premiums for piece-rate workers should be calculated.

In short, the DOL said that the employer, in this case, may calculate the regular rate of pay for piece-rate workers by dividing their earnings by the number of hours worked in a workweek, including both productive and nonproductive hours, even if they do not have a formal agreement.

While employers should have a written agreement that specifies piece-rate work covers productive and non-productive hours, the DOL noted that such an agreement can be inferred from the parties’ conduct. The DOL found that the employer’s customary practice and the employees’ acceptance of payment in this manner showed a mutual understanding and agreement. The labor watchdog also clarified that employees don’t have to understand the mathematical formula used to compute the regular rate, only that piece-rate earnings are intended to compensate them for all hours worked.

The Bottom Line

Employers who pay workers on a piece-rate basis can calculate their regular rate by adding all earnings for the workweek (e.g. piece rate, production bonuses, waiting time) and dividing that figure by the total number of hours during the workweek, including productive time, nonproductive time, and overtime hours. 

In sum, pierce-rate workers may be paid the regular rate of at least the minimum wage for all hours worked, and an additional one-half of the regular rate for all hours in excess of 40 during the workweek. Although this may be a customary practice, employers can mitigate the risk of disputes by having a written agreement with piece-rate workers or posting a notice specifying how the regular rate and overtime are calculated. Contact our team today to learn more.