by Jill Chasson, Coppersmith Brockelman PLC

When determining how to compensate nonexempt employees, employers have a variety of options. Paying an hourly rate is certainly the most common, but other methods include salary, commissions, daily rates, and piece-rate pay (sometimes referred to as piece work). Piece-rate pay refers to a system in which employees are paid a fixed amount per item of work completed per day or per week. Unfortunately, some employers don’t realize piece-rate workers are covered by minimum wage and overtime rules—or worse, they ignore the rules. This can result in substantial liability if employees file suit or complain to the U.S. Department of Labor (DOL). One Arizona company recently learned this lesson in a very expensive and burdensome way.<

Background

Piece-rate pay is most commonly used by manufacturing companies and other types of businesses in which outputs can be measured. For example, employees may be paid based on the number of products assembled, the number of autos serviced (and/or type of work done), or the number of appliances installed.

Like all nonexempt employees, piece-rate workers are covered by the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA), which means although piece-rate workers aren’t paid based on the hours they work, employers must still track each employee’s hours (in addition to total compensation for the week) so they can determine whether the employee has received at least the federal or the state minimum wage (whichever is higher) and whether the employee is due overtime pay for hours worked over 40 in a workweek.

Employer plastered for $700,000 for overtime violations

According to the DOL, in March 2023, Palo Verde Plastering of Glendale, Arizona, agreed to a consent judgment and order by the U.S. District Court in Arizona to resolve a two-year investigation into several wage payment issues, including nonpayment of overtime to employees the company paid on a piece-rate basis (“by the yard”). In its press release, the DOL says Palo Verde not only failed to pay the overtime rate but also told workers they weren’t entitled to overtime and “falsified [its] books by assigning wages earned to ‘phantom’ employees to avoid paying overtime.” Pro tip: Don’t falsify your time and payroll records.

Based on its investigation, the DOL found individual employees were owed sums ranging from $20 to more than $4,600 in overtime pay; collectively, 470 workers were owed $350,606.50. Under the order, Palo Verde must pay the workers what they’re owed, plus an equal amount in liquidated damages. In addition, the order affirmed the DOL’s imposition of $23,787 in civil monetary penalties. Altogether, Palo Verde’s improper pay practices are costing the company $725,000.

Additional remedies secured by DOL

But wait—there’s more. Because the DOL concluded Palo Verde deliberately violated the FLSA and recordkeeping regulations, the order includes the following additional requirements:

• If the company continues to use a piece-rate system, it must provide written notice to employees of the applicable piece rate, maintain specific records showing who is paid by that method, and allow employees to view its records to see how their weekly pay (including overtime) is calculated.
• The company must allow employees to track their daily hours, must train employees on how to fill out time cards, and may not allow supervisors to change employees’ hours.
• The company must hire a third party to conduct training for all supervisors, managers, and others with payroll duties on the FLSA requirements.
• The company must update its employee handbook to include a policy notifying employees they’re entitled to minimum wage and overtime pay and must post a summary notice (prepared by the DOL) for two years.

Piecing it together

Although there are advantages to piece-rate compensation, such as incentivizing workers to be more efficient and productive, employers that use this method still must comply with minimum wage and overtime requirements. That means keeping an accurate record of daily and weekly hours worked so piece-rate pay can be supplemented if necessary.

Jill Chasson is a partner at Coppersmith Brockelman PLC in Phoenix, Arizona. She’s well versed in the many federal and state laws that govern the workplace and regularly works with businesses of all sizes to develop workplace policies and resolve difficult personnel issues. When disputes arise, Chasson represents employers before administrative agencies, in arbitration proceedings, and in state and federal court. You can reach her at 602-381-5481 or jchasson@cblawyers.com.