Piecework pay, bonus and overtime pay – how do they collide?
April 21, 2017
By Michael Burns, courtesy of SBAM Approved Partner ASE
Piecework pay is not a common pay practice today. In fact, ASE’s most recent Pay Administration Survey found no participants paid on a piece-rate in the Southeast Michigan area. However, in some industries this is still a pay practice.
Piecework pay, rather than hourly or salary pay, is calculated by how many activities or units of productivity are achieved within a set period of time. Pay is usually calculated by a pay per unit of work method. (X) being the finished production unit(s), times (Y) being the rate of pay for said unit(s), equals (P) piece rate total for the pay period.
The advantage of a piece work approach to pay is that it incentivizes worker productivity. However, piece- rate plans do not normally pay for spoiled or flawed units thereby also encouraging quality. A disadvantages of piecework pay is that it pays a worker to ignore everything outside of their production, including other facets of the organization’s operation.
Piece-rate workers are non-exempt and must also be paid overtime when their hours of work exceed 40 hours in a workweek. They must also be paid at least the minimum wage. Pay for work over 40 hours a week must be calculated by computing overtime pay from the regular rate of pay. The regular rate of pay is calculated by adding total earnings for the workweek from all pay (this includes qualified production bonuses and even waiting time) subtracting out any adjustments for incomplete work and dividing that by the hours worked in a week. Piece-rate workers must be paid the total weekly earnings at the regular rate of pay plus overtime pay at one-half the regular rate multiplied by those hours worked over 40 in that week.
In a recent Ninth Circuit Court of Appeals case, Cable Communications, Inc. (CCI) did, a “production bonus” that was added to pay but was gradually reduced when overtime was worked (this bonus was 1/6 of the piece-rate). For CCI’s piece-rate workers this bonus was decreased as overtime increased. A condition that was no doubt added to the pay formula in order to control employees’ use of overtime. “People will do what you pay them to do” – says the compensation principal. So, if you make overtime more attractive, workers will be incentivized to work more hours, not less, and company compensation costs may naturally rise. The company’s formula of reducing the incentive bonus as more overtime was worked was meant, no doubt, to squash the force of that compensation principal.
However, the way CCI implemented both the production bonus and the overtime calculation resulted in workers being ultimately underpaid legal overtime pay. Because the production bonus was paid as part of normal income in a non-overtime week and then reduced for work over 40 hours in a week, the Ninth Circuit Court of Appeals saw that it was not a bonus, but in fact part of gross wages. CCI should have been determining the regular rate of pay by including the production bonus into the overtime premium. CCI’s failure to use this calculation approach violated the Fair Labor Standards Act. (Brunozzi v. Cable Communications, Inc., 9thCir, 167 LC ¶36,509)
Employers using pay methods that differ from the straightforward hourly or salaried pay method need to keep an eye on how overtime and other incentive pay calculates into weekly pay.