What Employers Need to Know About Paying Piece Rate

Date: July 15, 2016 Last Edit: July 18, 2016

Under both state and federal law, employers must pay at least minimum wage to employees. But one option has always been to pay a piece rate—i.e., to pay employees on a per unit basis for every project completed. For example, an employer might choose to pay mechanics based on a set rate for every car they may service, as opposed to paying an hourly rate. That is generally permitted, but employers must still comply with minimum wage, overtime and record keeping requirements under state and federal law.
How to Comply with Minimum Wage Law?
Outside of California, it is relatively easy to ensure compliance with minimum wage requirements. The employer needs to track the total number of hours worked in order to be sure that the employee’s take-home pay is at least what it would have been if he or she were paid on an hourly basis. This is as simple as dividing the employee’s piece rate compensation by the total number of hours worked.
For example, an employee might make $480 over the course of a 40 hour workweek. That comes out to $12 per hour—well above the minimum wage requirements in most communities. But in a City like Seattle, where minimum wage has been raised to $15 per hour, the employees’ piece rate pay will not fully satisfy the minimum wage requirement ($15 x 40 = $600). Accordingly, the employer would have to pay the difference ($120). And of course this calculation will vary week by week depending on how many projects the employee completes.
What About Overtime Requirements?
Once again, it’s vitally important to track the total number of hours worked. This is especially important for determining overtime pay. Indeed, just as with any other employee, piece rate employees begin to accrue overtime pay once they work more than 40 hours in a single week.
Unfortunately the overtime calculation is a little complicated. The employer must first determine the employee’s average hourly pay over the course of the week—including overtime hours. Then the rate of overtime pay is determined by multiplying the overtime hours by .5 percent of the base pay. 
For example, assume a piece rate employee works 50 hours and earns a total of $750 in piece rate wages over the course of the week. The base hourly pay is $15 ($750 / 50 Hrs = $15 per hour). Since the employee worked 10 hours of overtime, the employer must pay an additional $75 in overtime pay ($15 [base pay] x .5 [overtime rate] x 10 hours = $75). 
It’s Not So Simple in California!
But, as always, things are more complicated in California. It’s not enough for an employer to simply ensure that a piece rate worker is bringing home more than he or she would at minimum wage. California law now requires employers to compensate piece rate employees on an hourly basis for down-time—regardless of whether their take-home pay is significantly above the minimum wage threshold.  For example, a mechanic might make $85,000 servicing vehicles—well in excess of what he or she could make at minimum wage, on an hourly basis. Nonetheless, a few courts have ruled that these (already highly compensated) employees must be paid additionally for all time spent between twiddling their thumbs between projects. 
NFIB Small Business Legal Center sought to get the California Supreme Court to review those decisions; however, the State Legislature intervened. With enactment of Assembly Bill 1513, the Legislature made clear that employers, using a piece-rate compensation scheme, must pay employees for rest, recovery, and other non-productive periods—in addition to their piece-rate. 
What do I need to do?
For employers who wish to continue paying piece-rate, you will need to segregate non-piece-rate hours into two categories for pay roll purposes: (1) rest and recovery, and (2) other non-productive hours. Each must be compensated, in addition to whatever salary is earned through piece-rate.
Rest and Recovery Periods
Rest periods are required by the statute in California. Employers must allow 10 minutes net rest time for every four hours of work. And recovery time is a cool down period afforded to an employee to prevent heat illness. Time spent for rest and recovery must be compensated by the higher of either: (a) the average hourly rate determined by dividing the total compensation for the workweek [excluding compensation for rest and recovery breaks], by the total hours worked during the workweek [also excluding time spent on breaks], or; (b) the applicable minimum wage in the local jurisdiction. 
Other Non-Productive Time
AB 1513 also requires piece-rate employers to pay employees for other non-productive hours. This includes all non-productive “time under the employer’s control,” excluding rest and recover periods, as well as time spent working on piece-rate projects. Non-productive time must be compensated at a minimum hourly wage or higher.
Do I have Other Options?
These changes may prompt some employers to change their rate of compensation for piece rate projects. Since they must now compensate for non-productive time, in addition to rest and recovery breaks, some employers may see fit to pay a lower piece rate wage. Others may seek other alternatives to minimize the impact of the new rules, including altering their employee’s schedules. 
Of course, another option may be to discontinue the piece-rate system entirely. Indeed, it may be easier to pay a flat hourly wage. But, employers will want to weigh their options carefully. And it may ultimately be prudent to seek counsel from a trusted employment law attorney.
Safe Harbor Provision
Employers should also know that AB 1513 contains a safe harbor for employers who may have under compensated piece rate workers in the past. Specifically, the statute provides an affirmative defense for employers, which should theoretically immunize them from liability. But to qualify an employer must do the following:
(a) Pay employees for rest, recovery and non-productive time accumulated between July 1, 2012 and December 31, 2015;
(b) Give notice to the Department of Industrial Relations by July 28, 2016 (the date in the statute has been changed by court order); 
(c) Make all payments by December 15, 2016, and;
(d) Provide the employees with a statement summarizing how the payment was calculated.
But employers are advised to consult an employment law attorney before taking any action if they are concerned that they may have outstanding liabilities. Employers in this position should also discuss other potential settlement options, and or other remedies. For more information check out Ogletree Deakins’ guidance here. Also more information can be found on DIR’s website.

*This article does not provide legal advice. Employers are advised to retain counsel from a trusted attorney with experience in employment law. 

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