Does paying a piece rate lead to greater productivity?
Some construction companies pay employees based on the amount of work they complete because they find that a piece-rate structure leads to greater productivity on the jobsite than paying an hourly wage. But that depends on the type of project, as well as many other factors.
"If you've got the opportunity and have a well-defined scope [of work], piece work always makes sense to me," said Andru Ramker, president of Hawkeye Construction of South Florida in Safety Harbor, Fla.
Ramker said paying workers by the piece is well suited for large-scale projects with lots of repetitive tasks. For example, a big apartment complex typically has a set number of floor plans, and, for each unit type, estimators calculate the cost of project elements, like gypsum wallboard installation. When the contractor pays a worker hourly, the cost of wallboard installation can vary because the task could take more or fewer hours than allocated in the budget.
However, if a worker performs the installation for the exact labor-cost estimate, there are no cost overruns. Plus, the piece worker can earn more money than his hourly counterparts, depending on how many sheets of wallboard he can hang in a pay period.
The piece worker's mindset is often different from that of the hourly worker, Ramker said. “It’s all go, go, go,” he said. “They like it when they’re able to make more money.”
Safety and quality concerns
Despite its benefits, piece work has potential downsides, including creating unsafe work practices or lower-quality results that would reverse short-term productivity gains, said Peter Dyga, president and CEO of the Associated Builders and Contractors, Florida East Coast Chapter.
“[Workers] may look for ways of cutting corners,” he said, “which you don’t want to encourage.” Also, equipment could go without needed maintenance as piece workers try to avoid sitting idle.
Likewise, Dyga said paying a piece rate for one specific task could create a singular focus for the tradesman and limit his growth in other skills.
Furthermore, paying a piece rate might not be cost-effective for a custom job with layout variations or if there are plan changes or design errors. “You’re going to end up with hourly [work] then anyway,” Ramker said.
Potential fair labor violations
Paying a worker a piece rate also opens the door for Fair Labor Standards Act violations. Adam Chotiner, shareholder in the Florida law firm of Shapiro Blasi Wasserman Hermann and head of its construction law practice, said that's mainly because the employer must keep precise track of piece workers' hours as well as completion of whatever work is paid by a piece rate.
“It can be an administrative and a paperwork hassle,” he said.
Plus, Chotiner said, firms need to be able to prove that piece-work employees are at least getting paid minimum wage for hours worked. That is determined by taking the total earned and dividing by hours worked.
The federal minimum wage is $7.25 per hour. In Florida, where both Buchsbaum and Chotiner practice law, the hourly rate is $8.25 per hour, but the minimum wage varies from state to state.
If a piece worker is not earning at least minimum wage, it could mean he is not doing a good job — or that the piece rate is too low, said labor and employment law attorney David Buchsbaum, a partner in the Ft. Lauderdale office of Fisher Phillips. Either way, the employer must increase compensation so that the employee earns at least the applicable minimum wage, he said.
Calculating overtime pay
Calculating overtime pay for an employee paid an hourly rate is a simple matter of multiplying his standard rate by a factor of 1.5 when he works more than 40 hours. But the overtime calculation is not so simple for piece work.
According to Chotiner, there are two ways to calculate overtime for piece workers. The first method, which must be tabulated on a week-by-week basis, is to take the total compensation for the week and divide it by the total hours worked. “That gives you the regular rate,” he said. Then for each hour worked beyond 40, the employer has to add an extra 50% to the regular rate.
The second method, Chotiner said, involves the company agreeing to pay the piece worker 1.5 times the normal piece rate for work completed during overtime hours. This arrangement must be agreed upon by the employer and employee ahead of time in writing, he added.
The two calculations are not complicated, Buchsbaum said, but they necessitate taking time to maintain proper paperwork.
"The FLSA doesn’t speak in terms of how someone is paid," Buchsbaum said. “What the law says is that all employees are entitled to at least minimum wage and overtime unless they qualify for an exemption.” For the most part, he said, construction piece workers do not qualify for such an exemption.
But first, many construction industry employers have to recognize that piece workers are entitled to overtime pay, Buchsbaum said. “Paying a piece rate does not avoid overtime," he said. "It just changes the way it has to be calculated.”
Inadequate documentation issues
The consequences of not keeping proper paperwork could be costly. For example, in Florida, laborers and their lawyers have become much more aggressive pursuing wage violation claims, Chotiner said. An employee could be entitled to two times the unpaid amount, but if a company is found liable, it could also have to pay the individual's legal fees.
However, the reverse is not true. If the employer proves its case in court, it must pay its own legal bills, which is why Chotiner said he sometimes counsels clients to settle. "The employer can pay $50,000 to $100,000 in legal bills; it's cheaper to pay $10,000 to settle," he said.
But settling a claim doesn't get an employer off the hook. If the judge does not allow a confidentiality provision as part of the settlement, the lawyer said, the lawsuit could kick-start a flurry of other legal actions, which, for any company, means more legal bills and potentially more payments.
The risk is particularly great for small companies that grow quickly and whose owners still think of their employees as family members. Chotiner said the chance of a lawsuit being filed, even by long-time employees, is often not a question of if but when, because executives are focused on achieving growth milestones and not schooling themselves on labor laws.
“When you’re an employer, you have a target on your back," he said. “The bigger you are, the bigger the target.”
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