Finances and Taxes

What is Piece Rate Pay? A Guide for Employers

J.J. Starr  

Piece rate pay, also known as piece work pay, is a little complicated but can be a rewarding compensation system for both employers and employees. Unfortunately, some employers have used piece rate pay to underpay their employees in the past—for this reason, regulations regarding piece rate have become more strict. 

Piece rate pay is not suitable for every industry, and, for some employers, the added work of figuring out an employee’s pay may not be worth the time. But don’t discount it yet! This article will equip you with everything you need to:

  • Understand what piece rate pay is
  • Know if piece rate pay is right for your business
  • Calculate payments to employees
  • Comply with wage and overtime requirements
  • Understand special consideration for California employers

TL;DR FAQs:

What is a piece rate work contract?

A piece rate work contract is a document that both employers and employees agree to. Under this contract, employees are paid for the number of things produced or services rendered. This can also be called “output work,” because the employee is compensated by the measure of their output.

Is it legal to pay piece rate?

Yes, it is legal to pay piece rate. However, employers still need to comply with minimum wage laws, overtime, and state and federal record-keeping requirements. In the state of California, employers also need to compensate for rest, recovery, and other non-productive time. 

Which is better, piecework rate or hourly rate?

It depends on the business. Piece work pay can be advantageous in that it motivates employees to work harder and produce more goods (or complete more projects). Employees can make more money when they learn to work efficiently. This type of compensation is best suited to manufacturing businesses, agricultural work, and home services (landscaping, house cleaning, etc.)

A quick disclaimer before we dive in: this article is meant to guide you through the ins and outs of piece rate compensation. However, it is not a substitute for legal advice. Be sure to consult a lawyer if you have any questions about how to comply with labor laws.  

What is piece rate pay, and how does piece work pay work?

Piece rate pay was first used during the late Commercial Revolution (in the late Middle Ages) to compensate artisans for labor conducted at home. The piece rate pay system evolved for factory workers of the Industrial Revolution, where workers were paid per piece created within the factory. (That’s the end of the history lesson, folks!)

Piece work pay compensates employees based on the production of goods or services during working hours. It’s an alternative to an hourly wage where the employer sets a fixed rate per unit. Paychecks are calculated by multiplying the fixed pay rate by the number of units produced.

But it’s not that easy. To comply with the Fair Labor Standards Act (FLSA), piece rate workers must make at least the applicable minimum wage. (Federal, state, and local minimum wage laws vary; employers have to pay whichever is highest.) Further, employees working more than forty hours per week are entitled to time-and-a-half overtime pay. That means that employers must ensure that piece rate compensation meets or exceeds the equivalent of entitled wages.

Piece rate pay is common to certain businesses, including:

  • Manufacturing
  • Automotive repair
  • Construction
  • Painting
  • House and carpet cleaning
  • Medical care

Advantages and disadvantages of piece rate pay

While compensating on a piece rate basis is more complicated than an hourly wage, it can benefit both employers and employees. For some employers, the benefits of the piece rate system will outweigh the drawbacks.  

Advantages of piece work pay

  • It can incentivise workers to be more productive during working hours, which makes your business more efficient. 
  • Employees can earn more money in less time and it gives them a better sense of control over their compensation. 
  • Most of the time, it offers employees more scheduling flexibility, which can attract high-quality employees.
  • When you offer competitive rates, you can attract higher-quality workers and lower your turnover rate.
  • It’s easier to calculate manufacturing costs per piece produced. 

Disadvantages of piece work pay

  • It can be complicated to estimate how much product will be created during a set period because output varies day-to-day.
  • Calculating pay to fit local and federal minimum wage requirements can take more bookkeeping hours and requires more detailed record-keeping. 
  • It incentivizes workers to come in when injured or sick, which can hurt productivity in the long run. 
  • It can affect quality control when workers produce higher quantities. Getting consistent good quality products is challenging to sustain, especially in high-turnover environments. 

How to calculate piece work pay 

The simplest way to calculate piece rate pay is by multiplying the number of units produced by the rate per unit. However, this may not be appropriate for all types of work. Below is a table showing the three common types of piece rate compensation and the formula for calculating what your employee earned based on production.

Piece RateHow It WorksFormula
“Flat Rate” per pieceYou pay your employee per single item produced. Pieces x Rate = Paycheck Amount
“Flat Amount” per X piecesYou pay your employee per group of items produced, for example, $12 for ten units. If workers complete a partial group of items, you compensate for the partial group. For example they complete 15 units, which earns a pay out for 1.5 groups. (Pieces / Number in Group) x Rate = Paycheck Amount
“Wages + Piece Rate”You pay an hourly wage with an additional amount for piece rate production.(Hourly Rate x Number of Hours) + (Pieces x Rate) = Paycheck Amount

The Department of Labor also offers a piece rate calculator.

Of course, the math doesn’t end with calculating what’s owed based on production. You then need to verify that the payment is equal to or greater than the minimum wage the employee is owed. 

To do so, multiply the hours worked by the wage rate. If the minimum wage earnings are higher than the piece rate earnings, you’ll pay the difference between the two amounts. Let’s look at an example of the production of two employees during one week of work:

Employee A

  1. 240 pieces x $2.50 flat rate = $600
  2. 30 hours x $15 per hour =  $450

Employee B

  1. 120 pieces x $2.50 flat rate = $300
  2. 30 hours x $15 per hour =  $450

Employee A has made more than minimum wage, so you do not need to offer a differential. But Employee B has earned less than minimum wage, so you’ll need to pay an additional $150 to ensure they’ve made minimum wage. 

Things get a little trickier when your employee qualifies for overtime pay. Let’s take a closer look.\

Calculating overtime with piece rate pay

When piece work employees work more than 40 hours per week, you still need to compensate them for overtime. That means that you need to ensure that your employees’ pay covers both minimum wage and overtime compensation.

Overtime pay for piece rate employees is still time and a half. You can calculate overtime pay in two ways:

  1. Multiply the units produced by the flat rate. Divide this number by the total number of hours worked to get the employee’s base rate. Then multiply the base rate by 0.5 (the overtime rate) and multiply that number by the number of overtime hours worked. Add this number to the piece rate payout to get the total payout for the week. Your process will look like this:

Calculating the base rate: (320 units x $3.50 flat rate) / 50 total hours worked = $22.40/hour base rate

Calculating the additional overtime pay: $22.40 base rate x 0.5 overtime rate x 10 overtime hours = $112

For the week, your employee is entitled to $1,232. ($22.40 x 50 hours + $112 overtime = $1,232)

But there is a simpler way to calculate overtime piece rate pay. To do so, your employee needs to be in agreement with you. The agreement doesn’t have to be in writing, but it’s best to have a written record to protect your business. Here’s the second option:

  1. You pay 1.5 times the flat rate for units produced during overtime hours. You’ll just need to set up a way to account for overtime production. Here’s what the calculation will look like:

(270 units x $3.50 flat rate) + (50 units x $5.25 overtime flat rate) = $1,207.50

As you can see, the calculation doesn’t always work out to the same payout. And this doesn’t always mean your employee is paid less with the second option. A downside of using this simplified calculation is that it may incentivize your employee to produce more when they are more likely to be suffering from fatigue. That can mean lower-quality production. 

Special considerations for California employers 

As with many regulations, California does things a little differently. There, employers need to pay for rest, recovery, and other non-productive periods. This is in addition to piece rate pay.

Assembly Bill 1513 was passed in 2015 to protect workers from exhaustion and exploitation. In a state with a high amount of agricultural workers, many of whom are paid on a piece rate basis, these precautions make sense. 

According to the California Department of Industrial Relations, these additional pay requirements are defined as such: 

  • Rest and recovery: employers must compensate piece-rate employees a rest period of ten minutes for every four hours worked. An additional recovery time (think cool down period) must also be compensated.
  • Non-productive time: this is any “time under the employer’s control” excluding rest and recovery periods.

Rest and recovery is compensated at the higher of the following rates:

  • the average hourly rate—total compensation for the workweek excluding rest and recovery compensation, or
  • the minimum wage in the local jurisdiction.

Non-productive time must be compensated at minimum hourly wages or higher. 

Finally, if you offer (or are required to pay) double overtime, you also need to calculate piece rate overtime compensation earned by working holidays, overnights, weekends, or extra-long shifts. 

If you’re an employer in California, piece rate compensation can still work. There are added variables to account for, but it can pay off. Ensuring employees are well rested, recovered, and compensated leads to higher output, quality, and employee satisfaction. That often means less turnover and less time finding and training new employees.

Is piece rate pay right for your business?

For some businesses, piece rate pay is worth the additional time it takes to calculate compensation. It attracts and motivates workers and makes production costs more predictable for employers. 

For other businesses, an alternative compensation plan is easier to manage. And there’s no shortage of options, including:

  • Hourly wages
  • Salary
  • Commision, with or without hourly wages
  • Non-discretionary bonuses 

However you decide to compensate your employees, Gusto has you covered. Though piece rate pay can be a little more complicated to track, our payroll software makes the process much easier.

J.J. Starr
J.J. Starr J.J. is an educator, personal finance writer, and former registered banker. She's helped dozens of small businesses set up and manage their day-to-day expenses, secure business loans, and develop financial plans.
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