Piece rate pay is an effective compensation strategy that can help companies motivate workers, improve productivity, and control labor costs.

What is piece rate pay?

Piece rate pay is a compensation system where employees are paid based on the number of units or pieces they complete, rather than through a fixed hourly wage or salary. The pay is directly tied to the employee’s productivity, meaning the more units produced or tasks completed, the more the employee earns.

For example, if an employee is paid $2 for each product they assemble, and they assemble 100 products in a day, their total pay for the day would be $200. The rate per piece is predetermined by the employer and should comply with minimum wage laws.

For employers, a piece rate pay model can help increase productivity and enable a performance-driven culture. It can also make it easier to track and manage labor costs.

Types of piece rate pay

There are several types of piece rate pay, as follows:

Straight piece rate

Employees are paid a fixed amount for each unit of work completed, regardless of the time spent.

As in the example above, an employee might be paid $2 for each item assembled and assemble 100 units in a day. This would result in daily earnings of $200 ($2 x 100).

Differential piece rate

The piece rate increases after the employee produces a certain number of units.

For example, an employee might earn $1.50 per item for the first 100 items, and $2 per item for any additional items produced beyond that. If they produce 125 items in a day, they would earn:

($1.50 x 100 = $150) + ($2 x 25 = $50) = $200

Combined piece rate

Employees receive a base hourly wage along with a piece rate for the number of units they complete above a certain threshold.

For example, an employee might earn an hourly wage of $15, plus $6 for every unit produced beyond the first 100. If they produce 110 units in an eight-hour shift, they would earn:

($15 x 8 hours = $140) + ($6 x 10 = $60) = $200

Who uses piece rate pay?

Piece rate pay is primarily used by companies in industries where work output can be easily quantified, such as:

• Manufacturing: Employees might be paid for each item assembled or product produced.

• Agriculture: Workers may be paid for the amount of produce harvested, such as fruits or vegetables.

• Textiles and garments: Employees are often paid per article of clothing sewn or piece of fabric processed.

• Construction: Employees might be paid for each unit of work completed, such as a certain number of bricks laid or meters of fencing installed.

Things to consider

While piece rate pay can be a beneficial approach, there are also several factors to consider, including:

Compliance with minimum wage laws

You must ensure that your piece rate employees still earn at least the minimum wage when their total output is divided by the number of hours worked. Using the combined piece rate approach can make this easier.

If relevant, you must also ensure that piece rate workers are receiving proper overtime pay.

Quality control

Piece rate employees may be tempted to slip on quality in an effort to produce more units (and make more money). As a result, you’ll need to implement quality control measures to ensure that standards are being met.