Business Tips

overtime for piece rate workers

Are you calculating piece-rate overtime correctly?

Overtime pay can be tricky to calculate, especially for workers who are paid via a fixed piece rate—but discrepancies in overtime-pay calculations can cost business owners.

What is “piece rate”?

A piece rate is based on the number of units that a worker completes, and is a fairly common payment method in certain subcontracting sectors of the construction industry. For example, plumbing subcontractors might pay workers based on the number of faucets they install in a large commercial project, rather than by the number of hours they work each day.

No matter how workers are paid, they are entitled to overtime, according to the Fair Labor Standards Act (FLSA), which sets policies for establishing minimum wage, calculating overtime pay, and recordkeeping, says Bill Dunn, director of government relations at the American Payroll Association.

Correctly calculating overtime depends on determining an individual’s workweek and hourly rate of pay, and keeping track of both. This is required for both hourly and piece-rate workers.

No matter how workers are paid, they are entitled to overtime, according to the Fair Labor Standards Act (FLSA).

The lowdown on overtime

“Under FLSA, people are entitled to overtime for any hours they work over 40 in a week,” Dunn explains. “You have to establish a workweek, which is seven consecutive days, and it can start any day of the week. The overtime rate is paid at one and a half times the regular rate of pay, so establishing the regular rate of pay is key to overtime.”

Employers are required to pay workers at least the federal ($7.25/hour) or state minimum wage, whichever is higher. A worker’s hourly rate—even if they are paid via a piece rate—should be established before any work is done, Dunn explains.

To determine a piece-rate worker’s regular rate of pay, employers should divide the total amount that they’ve made during a workweek by the number of hours they worked. From there, Dunn says overtime can be calculated using two methods.

“The first method says that once you’ve established the regular rate of pay, they’re entitled to one and half times that for every overtime hour,” he explains.

Examples of overtime calculations

The U.S. Department of Labor, which enforces the FLSA, provides the following example. An employee works 45 hours in a week and earns $405. The regular rate of pay for that week would be $9 per hour ($405 divided by 45). On top of the regular rate, the employee is entitled to an additional half the regular rate, which would be $4.50, for each hour that they worked over 40 hours. This would be $22.50 for the five overtime hours, so the total pay for the week would be $427.50.

“The second way it can be calculated is—and this has to be established beforehand—an agreement between the employer and the employee that they will be paid 1.5 times the piece rate,” Dunn says.

For example, if a worker is paid $10 for every faucet installed, an employer might agree to pay them one and half times that—or $15 per item—for any faucets installed after the worker has logged 40 hours that week.

If a worker is paid $10 for every faucet installed, an employer might agree to pay them one and half times that—or $15 per item—for any faucets installed after the worker has logged 40 hours that week.

Employers are responsible for paying employees accurately and keeping accurate records, he says.

Why employers fall short—and get dinged

According to the DOL, some common overtime pay errors that employers in the construction industry make under FLSA include:

  • Failing to record all hours actually worked, including time worked before and after a shift
  • Shorting hours based on downtime or weather delays
  • Banking of overtime hours or pay in the form of “comp time”
  • Failing to combine hours worked by an employee in more than one job classification for the same employer in the same workweek
  • Not segregating and paying overtime on a workweek basis for employees who are paid bi-weekly or semi-monthly

Employers that commit any of these errors may be subject to a DOL audit, which could result in recovered back wages and liquidated damages, as well as penalties by the government.

“The key is to track the time,” Dunn emphasizes. “You’re going to have trouble paying overtime if you’re not tracking how many hours people are actually working. Another key is establishing the regular rate of pay. If you have those down, then you should be good. Actually putting that into practice might mean getting a time and attendance program or keeping some kind of record. That’s going to be the foundation of paying accurate overtime.”