New Considerations for Piece-Rate Pay Plans
Court ruling could have far reaching effect on dental laboratory payrolls
A recent ruling by the California Appellate Court could directly and significantly impact how laboratory owners pay technicians who are compensated on a piece-rate basis. If this ruling gains traction in other states and industries, it could also impact working conditions all over the country. The ruling involved auto technicians and how they are compensated. Traditionally, auto technicians have been compensated by a flat rate based on the type of auto repair they perform, a rate significantly
higher than minimum wage. Pay was calculated by multiplying the number of hours spent repairing autos by the hourly flat rate assigned to that task. Under this type of plan, technicians who completed the task more quickly than the assigned hours were rewarded for their efficiency and, if the job took longer than the standard hours assigned the task, the argument was that the high wages paid would ensure the mechanic earned more than minimum wage.
However, technicians were paid only for hours spent actually making repairs and not for other time spent on the job. At issue were the hours that auto technicians spent not performing actual repairs, as well as whether they were entitled to additional hourly pay for the time spent performing these duties.
The attorneys for the defendant argued that by guaranteeing minimum wage for every hour worked, his client satisfied the minimum wage obligation. The attorneys for the plaintiff claimed that the piece-rate plan compensated employees only for time spent making repairs, and did not consider waiting time between jobs, time spent on attending meetings, training, waiting for parts, and many other instances where the employee was not performing repair duties. The court in this case agreed with the plaintiff, arguing that this type of pay plan constituted illegal “pay averaging” and that the mechanic is still entitled to a separate pay for hours spent on the job without performing any repair. The court awarded the plaintiff in excess of $1.5 million dollars in lost wages.
Unless the California Supreme Court overturns the Appellate Court ruling, the implication for industries paying workers on piece-rate basis in California is that workers must be paid separately for work that does not fall within the scope of the task that is the subject of the piece-rate. If the court’s decision were to become enforceable in the dental laboratory industry, laboratory owners would have to design two pay strategies—one, a piece-rate for tasks that are considered piece-rate tasks, and a second at or above minimum wage for non-piece-rate tasks, such as mandatory meetings, time spent cleaning the work station, unbillable repairs, adjustments made to an already completed tasks, etc.
The California minimum wage law requires that employees receive at least minimum wage ($8.00/hr) for every hour worked, regardless of the task performed. The only authority supporting a claim that piece-rate compensation may be paid only for time spent actively making “pieces” is section 47.7.1 of the Division of Labor Standards Enforcement Policy and Interpretations Manual. This section of the Division of Labor Standards states that an employer may not pay piece-rate during periods of time when the employer “precludes” an employee from earning a piece rate.
Piece-rate as a pay strategy can still be the most efficient pay structure in a production environment such as the dental laboratory, and it must be configured with fairness to both the employee and employer. The employer must compensate employees fairly for their time on the job, considering time spent producing piece-rate tasks and non-piece rate tasks. Also, employees must negotiate their piece-rate based on production capabilities and not just quality and ability.
If you are looking to develop an effective piece-rate plan, here are some factors to consider:
Employees can earn more through individual skill, effort, and consistency.
Better organization cash flow—as work is performed faster, projects are finished earlier.
Labor costs are more predictable, and relate more closely to estimated times or standard costs.
A simple pay plan, transparent and fair, is administered without undue clerical effort.
Reporting is often improved, which helps to identify delay and waste for quick improvement.
Rates can be tailored with unique features for employees or departments with different characteristics.
When configured with fairness to both the employee and employer, piece-rate planning can be the most efficient pay structure in a production environment.
Nick Azar is a consultant, business strategist, executive coach, and founder of Azar & Associates. | firstname.lastname@example.org