What is the correct way to calculate overtime with a piecework compensation model. For example, an employee worked 46 hours in a week, He made 50 widgets and compensated at $10.00 per widget. Company doesn’t want to pay more than $500 for widget total… How should the pay codes on the paycheck be listed to ensure FLSA overtime rule compliance along with staying inside the company compensation plan budget?
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Based on our review, your state does not have separate laws related to overtime and how the regular rate of pay is calculated for determining overtime. This response, therefore, is based on the federal Fair Labor Standards Act (FLSA).
There is a detailed explanation on how to calculate overtime including the regular rate of pay for those paid on a piecework basis on the Overtime topic analysis on HR.BLR.com. For your convenience, the part most relevant to you question is copied below.
Piecework. When an employee is employed on a piece-rate basis, his or her regular hourly rate of pay is computed by adding together his or her total earnings for the workweek and dividing by the number of hours worked in the week. For overtime work, the pieceworker is entitled to extra half-time pay at this rate for all hours worked in excess of 40 in the workweek.
In the scenario you describe, If the employee is paid $500 and works 46 hours in a week, the regular rate of pay would be calculated by dividing the $500 by 46 making the regular rate of pay for that week $12.07 per hour. The employee would then be entitled to an additional 6 hours of pay at half this rate or $6.04 to cover the overtime pay requirement. Based on this calculation, the total pay for the week described would be approximately $536.24.
In order to pay appropriately for overtime hours and have the employee paid a maximum of $500 for 50 widgets, the compensation per widget would have to be adjusted. If the employees routinely work 46 hours per week to meet the 50 widget production level, this might be relatively simple to do so long as the regular rate of pay would equal or exceed the minimum wage under federal and state law.
If the number of hours worked or number of widgets produced each week fluctuates, this would be far more complicated and it would be a good idea to consult with local employment counsel to make sure the plan complies with all applicable laws.