Some employers pay piece rate to establish an incentive system. Piece rate systems tend to be used in the agriculture, manufacturing, automotive-repair and truck-driving industries, but other industries use it as well.

All requirements that apply to hourly employees also apply to piece rate employees.

• At the end of the payroll period, an employee paid on a piece rate basis must receive at least minimum wage for each hour worked, despite slow production hours or slow production days.2 Special rules also apply to compensating for rest and recovery periods and nonproductive time.

This topic contains the following information:

• Calculating Compensation for Piece Rate Workers
• Compensation for Rest and Recovery Period
• Compensation for Nonproductive Time
• Wage Statement Requirements for Piece Rate Employees
• Repeated Work
• Overtime Calculation for Piece Rate Employees

Calculating Compensation for Piece Rate Workers

In general, the piece rate is based upon a set figure paid for completing a particular piece of work or task or for making a product. The piece rate that is paid to the employee includes time spent producing the particular product or completing the particular task.

California’s Labor Code 226.2:

• Requires that piece rate employees be compensated for rest and recovery periods and all other periods of “other nonproductive time” separately from any piece rate pay and at specified minimum rates;
• Has specific wage statement requirements; and
• Specifically states that it doesn’t limit or change minimum wage or overtime compensation requirements and doesn’t change the obligation to compensate employees for all hours worked under any state law or local ordinance.3

• If your company uses a piece rate compensation system, you should consult with legal counsel to ensure compliance with these requirements. Employers should also ensure that nonexempt piece rate employees are recording all hours worked and are being provided with meal and rest breaks.

The Department of Industrial Relations has several examples on how to calculate piece-rate pay.

Compensation for Rest and Recovery Period

If using a piece rate system, employers must separately compensate employees for rest and recovery periods at a specific hourly rate.4 You must compensate workers for rest and recovery periods using whichever of the following rates is higher:

• The applicable minimum wage whether local, state or federal; or
• The employee’s average hourly rate, which is determined by dividing the total compensation for the workweek (excluding pay for rest and recovery periods and any premium pay for overtime) by the total hours worked during the workweek (excluding rest and recovery periods).

• Since the employer must pay the higher of the two amounts, you must calculate the average hourly rate per pay period and compare it to the applicable minimum wage to determine which is higher.

Example:

• A piece-rate employee works a five-day, 40-hour workweek. The employee has two 10-minute rest periods authorized and permitted each day for a total of 100 minutes (1.67 hours) of rest periods per workweek. The employee earns $700 in piece-rate compensation for the workweek.
• The average hourly rate is calculated as follows: $700 (total compensation not including compensation for rest periods) divided by 38.33 hours (total hours worked, less rest periods) = $18.26.
• As long as the $18.26 average hourly rate is higher than any local, state or federal minimum wage (check local ordinances), the average hourly rate of pay is used for the rest periods.
• $18.26 x 1.67 hours = $30.49 (compensation for rest periods for the workweek).
• Total compensation for the workweek is: $700 (piece-rate compensation) + $30.49 (compensation for rest periods) = $730.49.

Special Rule for Piece Rate Employees Paid Semi-Monthly

For companies who pay employees semi-monthly, a different requirement applies when calculating the average hourly rate, since the pay period may close before the average hourly rate for the workweek can be determined. For instance, the pay period may close on a Wednesday but the workweek doesn't end until Saturday. An employee who is paid semi-monthly must be paid at least the minimum wage for rest and recovery time in that payroll period. If, after calculating the average hourly rate, the employer determines that the employee is owed additional pay, that extra amount must be paid in the next paycheck.5

Compensation for Nonproductive Time

Labor Code section 226.2 also requires employers to pay piece rate employees separately for “other nonproductive time.”

“Nonproductive time” is defined as “time under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis.”6 Nonproductive time may include time spent waiting for work, conducting pre-work inspections, cleaning or attending meetings.

For example, a court held that auto technicians being paid piece rate had to be separately compensated for nonproductive time when they waited for repair work and engaged in nonrepair tasks, such as cleaning, attending meetings, reviewing service bulletins, obtaining parts and traveling to other locations to pick up or return cars.7

• You may find it difficult to determine which activities aren’t directly related to the piece rate work and must be compensated separately. Consult legal counsel with any questions regarding what constitutes nonproductive time.

Employers must pay piece rate workers for nonproductive time at an hourly rate that is at least the applicable minimum wage (whether local, state or federal).

If, in addition to piece rate wages, you pay employees an hourly rate that is at or above the applicable minimum wage for all hours worked you do not have to separate compensate employees for nonproductive time and you will be considered in compliance with that requirement in the statute. Further, if you pay a base hourly rate for all hours worked, you aren't required to specify the total hours of nonproductive time on the wage statement. For more information, see ”Wage Statement Requirements” on this page.

• In a recent court case, the Ninth Circuit reviewed and upheld an employer's piece-rate compensation plan. The employer paid their truck driver employees minimum wage for all hours worked. It would also pay an “activity-based bonus amount” for eligible activities, such as miles driven, stops made, and loading and unloading their vehicle. The activity-based bonus was calculated by subtracting the hourly amount from the eligible activity pay. If the result was positive, the employee would get that extra amount on top of their hourly wages. If the result was zero or negative, they would only be paid their hourly amount.

Even though “convoluted,” the plan paid drivers the minimum wage for all hours worked in their shift. Because the driver receives a minimum wage for all hours worked regardless of the type of work performed and then adds piece-rate compensation should the driver achieve results that make them eligible, this piece-rate compensation plan isn't borrowing compensation from one type of work to cover deficiencies in other types.8

You can determine the amount of time spent on nonproductive work either by actual records or through your “reasonable estimates” for a particular employee or group of employees.

• It is unclear exactly how an employer could make or defend a “reasonable estimate” of the amount of time spent on nonproductive work. Absent further guidance, best practice is to document all time spent on nonproductive work.

If you make a good faith error in determining the total or estimated amount of nonproductive time worked during the pay period, you must pay the employee for that nonproductive time. However, you will not be liable for any statutory or civil penalties, based solely on that good faith error, if:9

• You provide the required wage statement information;
• You pay the employee the compensation due for the amount of nonproductive time you determined; and
• The total compensation paid for any day in the pay period is at least the minimum wage due for all hours worked and any required overtime.

• If you believe you have made a good faith error in your calculation, consult your legal counsel as to how to ensure that you have properly corrected the error.

Wage Statement Requirements for Piece Rate Employees

At the time wages are paid, employers must provide each employee with a written itemized wage statement or pay stub that contains specific information. For more information, see ”Itemized Wage Statement” in Form of Wage Payment.

Wage statements given to piece rate employees must include the number of piece rate units earned and applicable piece rate, and the following specific information for each pay period:10

• The total hours of compensable rest and recovery periods, the rate of compensation for those periods and the gross wages paid; and
• The total hours of nonproductive time, the rate of compensation for nonproductive time, and the gross wages paid for such time (this is not required if you pay a base hourly rate of at least the minimum wage for all hours worked in addition to the piece rate).

Repeated Work

You can require employees to redo their work without paying them additional piece rate, as long as you pay the minimum wage for each hour worked in the payroll period. For example, when a mechanic is required to redo a brake job, that mechanic isn’t entitled to a second piece rate. However, they are guaranteed minimum wage for the total hours worked in the payroll period, including the time spent redoing the brake job. The same principles apply to other piece rate employees. Be sure to notify employees of the reduced rate of pay before the redo work is performed.

Overtime Calculation for Piece Rate Employees

Piece rate employees are entitled to premium pay for overtime hours. However, the overtime calculation is different than for hourly employees.11 First you must calculate the employee’s regular rate.

To calculate the regular rate for piece workers, , divide the total compensation for the workweek by the total hours worked. For each overtime hour worked, the employee is entitled to an additional one-half the regular rate (when owed time and one-half) or to the full rate (when owed double-time).For more information on calculating the regular rate of pay, see Overtime Pay.

Once you have calculated the regular rate for your piece-rate workers, you can then determine overtime pay.

1. DLSE Enforcement Policies and Interpretations Manual sec. 2.5.1