Piece Rate Pay Overview
A piece rate pay plan can be used by a business that wants to pay its employees based on the number of units of production that they complete. Using this type of pay plan converts compensation into a cost that directly varies with sales, assuming that all produced goods are immediately sold. If goods are instead stored in inventory for a time and then sold at a later date, there is not such a perfect linkage in the financial statements between sales generated and piece rate labor costs incurred.
Use the following method to calculate wages under the piece rate method:
Rate paid per unit of production × Number of units completed in the pay period
If a company uses the piece rate method, it must still pay its employees for overtime hours worked. There are two methods available for calculating the amount of this overtime, which are:
- Multiply the regular piece rate by at least 1.5 to arrive at the overtime piece rate, and multiply it by the hours worked during an overtime period. You can only use this method when both the company and the employee have agreed to use it prior to the overtime being worked.
- Divide hours worked into the total piece rate pay, and then add the overtime premium (if any) to the excess number of hours worked.
In addition, an employer using the piece rate pay system must still ensure that its employees are at least paid the minimum wage. Thus, if the piece rate pay is less than the minimum wage, the amount paid must be increased to match the minimum wage.
Piece Rate Pay Example
October Systems manufactures customized cellular phones, and pays its staff a piece rate of $1.50 for each phone completed. Employee Seth Jones completes 500 phones in a standard 40-hour work week, for which he is paid $750 (500 phones × $1.50 piece rate).
Mr. Jones works an additional 10 hours, and produces another 100 phones during that time. To determine his pay for this extra time period, October Systems first calculates his pay during the normal work week. This is $18.75 (calculated as $750 total regular pay, divided by 40 hours). This means that the overtime premium is 0.5 × $18.75, or $9.375 per hour. Consequently, the overtime portion of Mr. Jones’ pay for the extra 10 hours worked is $93.75 (calculated as 10 hours × $9.375 overtime premium).
If October Systems had instead set the piece rate 50% higher for production work performed during the overtime period, this would have resulted in the overtime portion of his pay being $75 (calculated as $0.75 per unit × 100 phones produced).
The difference in the payout between the two overtime calculation methods was caused by the lower productivity level of Mr. Jones during the overtime period. He assembled 25 fewer phones during the overtime period than his average amount during the normal work week, and so would have earned $18.75 less ($0.75 overtime premium × 25 phones) under the second calculation method.