What's the prohibition that makes these wage agreements illegal?

Factual Questions
1

I’m neither an employer nor an employee faced with this kind of decision, I’m just curious.

The set up today involves Bob, who plans to open a widget factory. Bob is pricing out parts and a building and all those other things when he remembers labor costs. Federal Minimum Wage is $7.25/hour (and Bob is setting up shop in a state that doesn’t have a higher minimum wage) and it takes the average worker about two hours to make a widget. Thus, widgets have a labor component that costs Bob about $15 a widget.

Most businessmen would accept this, but not Bob. Bob has a plan to save himself some cash. His plan is this: instead of offering his workers a wage, he’ll offer them cash per widget made. Kind of like a car dealership - sell no cars, make no money. Make no widget, make no money, make tons of widgets, make tons of money. Bob’s plan is to offer workers $10 per widget made, thus saving himself 1/3 of his labor costs, and motivating his workers to make widgets faster! (And probably at a lower quality. Assuming the widget makers don’t figure out this scheme sucks and quit. Let’s ignore that part).

Anyway, Bob is explaining his crafty scheme to his bar buddy, and the bar buddy points out that won’t work, because the feds made his obvious workaround illegal and called it… well, what do they call it? This seems like some thing some goof would have tried and I imagine the Department of Labor frowns upon it, but is it actually illegal, and what’s the law that makes that illegal but makes the commission work A-OK?

Well, Bob’s bar buddy Billy (say that 5 times fast) has a counter proposal: Instead of offering a per-widget price, offer the workers profit sharing in lieu of wages. In short, a co-op. Bob will do all the work of the sourcing and marketing and selling for 50% of the profits, and his workers will get the other 50% (maybe divided evenly, per hours worked, per widget made… I’m sure there’s lots of permutations). Of course, what Bob doesn’t have to tell his workers is he’s planning to sell his boatload of widgets under market… like, cost of materials + $20 under market. Thus causing 50% of the profit per widget to be the $10 Bob was originally wanting to make the labor cost. What does Bob care, he’s got 1000 dudes making widgets, even at $10/widget he’s making bank.

Anyway, around this time the bartender shoos them both away (her brother is a widget worker, and all this talking of screwing the little guy annoys her), but she too figures the feds must have figured that scheme out already, and it must be illegal too, but she can’t quite put her finger on why.

Or are both of these “avoid the minimum wage by not calling it a ‘wage’ and employing suckers” plans actually legal, and just not in place because the kind of workers that make widgets are smart enough not to fall for that?

2

Couldn’t he just pay them in widgets ?

3

IANAL but it sounds like you’re talking about “piece work” pay, which can be legal if you meet minimum wage/overtime requirements

4

If this site is correct, the commission work isn’t A-OK if the result is “sell no cars, make no money.”

5

Under the Fair Labor Standards Act, the employer’s obligation is to pay employees a minimum rate for the hours they work. This is basically true regardless of how the compensation is actually structured. For example, employers may pay employees on a piece rate basis or commission basis, as long as they receive at least the equivalent of the required minimum hourly wage rate and overtime for hours worked in excess of 40 hours in a workweek.

As for structuring as a co-op, it would depend on the exact facts. It is possible to actually structure as a co-op and not have FLSA employees, but probably not in the scenario you offered in which you actually control all the decisions about how the work gets done, hiring and firing, etc.

6

If the person works for you, as the link says, you must pay minimum wage based on hours worked plus applicable overtime. You can rearrange pay calculations any way you want, but it can’t go below minimum wage. If it takes 2 hours to make a widget, that’s $14.50 so not a lot of wiggle room.

You can’t call it commission if the employees aren’t doing the selling… so plan B is actually plan A with a different set of words. Same requirement- meet minimum wage requirements.

There’s also a whole series of requirements that distinguish a contractor from an employee. Things like if they have fixed shifts, supervisory levels, rules they have follow, etc. If your cleaning company can show up any time after 5PM and it can be one person or two- contractor. If you must show up at 6PM spend 8 hours and do what Bob tells you - employee.

7

[Rodney Dangerfield]What’s a widget?[/RD]

8

Thanks all - Piece Rate was the term I hadn’t heard. I didn’t realize the FLSA was so broad, but it makes sense.
I am interested in how the co-op could work. Not the one in the OP, obviously that one isn’t going to pass muster, but how do they generally work in the real world?

9

I think in the real world most co-ops still follow FLSA because the workers are still effectively employees. The test is who controls decisions like when they work, what they do at work, hiring/firing, who furnishes the capital, and other things. If you genuinely have a bunch of shareholders who either make those decisions by some democratic vote or elect committee members of shareholders who make those decisions, then I think you avoid FLSA.

The most common form of organization that avoids FLSA is just a partnership. Partnerships can grow quite large, but they tend to be in firms where the work isn’t highly stratified, like law firms.

10

Long story short, you can’t just decide to make your employees into contractors to get around FLSA. If it looks like an employee and quacks like an employee, it’s an employee. You can promise your employees any pay structure you like but if the end result is below minimum wage for hours actually worked, you have to make up the difference.

To actually be contractors, there’s a long list of guidelines. Two examples: you can micromanage employees but contractors must be allowed to work unsupervised; also employees can be required to start and stop at a specific time of day but contractors are allowed (within reason) to start and stop whenever it suits them. But the real kicker is that if you ever, ever, EVER* have two people who work for you with the exact same job description and they do it the exact same way, and you call one of them an employee and the other a contractor, then you’ve screwed up as far as the IRS is concerned. Their usual remedy is to make you pay back payroll taxes on the so-called “contractors” who are actually employees.

The third option is to make them “owners”, and thus aren’t subject to minimum wage laws. But there’s restrictions on that too. Once again, if it looks like an employee and quacks like an employee, it’s an employee.

  • This even applies to workers who are separated in time by several years, or possibly even the same person if their status changes.
11

oops duplicate post

12

Made me laugh.

13

You sure they aren’t building fidget spinners? Cause that train has done left…and Taiwan and Mexico got all the money.

14

Okay then, what stops the Big Boss from making all his widget-makers “managers” and putting them on salary?

Or, just put the work out on Amazon Mechanical Turk and they’ll make your widgets for ten cents each.

15

As with other parts of the statute, the law does not turn on how the enterprise characterizes its people. Instead, there are functional tests that examine whether a particular potential employee is an employee (and not a contractor) or meets some exemption (for executives, say).

So you cannot just call someone an executive and then treat them like a factory worker. They would actually have to be an executive and do executive stuff.

At a guess, I imagine the people who participate in the mechanical turk program are independent contractors. Though, like many positions in the new economy, this is something the courts will probably eventually sort out (like how to characterize Uber drivers).

16

This method of payment is “piece rates”.

The piece rates work in some industries, but by and large, if they don’t pay at least minimum wage , when calculated per hour for a proficient worker, the worker’s arent accepting it.
Thats what the law is… if it can reasonably result in minimum wage in terms of dollars per hour, then its ok.

There really is no way any business or person can work for you and accept less than minimum wage… It costs more to live while earning an income… What some industries have done is exploited students and illegal immigrants for manual labour of certain fixed terms, such as for building and landscaping… The worker may get free accomodation and food, and that might actually be what they consider reasonable… But the gov may ignore the freebies and look at the monies paid over only… For widget making it seems that you’d prefer skilled workers who stayed with your company for a while… not just week by week.

See http://www.lang-klain.com/publications/constructionadvisor/piece-work.htm

17

A partnership or Co-op, IIRC, each person owns a piece of the business. Now you’re getting into share ownership and capital gains. Someone owns the bank account, the factory, the production machinery. This has value. In most corporations, dividends are paid (i.e. profits paid out) based on percent of shares owned. So those shares have value. Similarly, a 1/30th share of a partnership has value. So how does a new (non)employee get their shares to start with, and what happens when they leave? If you give someone something of value, then they own it. When they quit working there, they probably have to sell/give back those shares. Transferring something of value is capital gains. I’m thinking your corporate lawyers are going to be the biggest winners.

Still boils down to - if they work for you, and they can’t decide their own working situation (big long “I’m a contractor” list) then they’re employees. As such, you pay them at least minimum wage and you pay the government the necessary taxes. Anything less is against labor code.

18

Sounds like the situation here in the UK is pretty much the same. I was reading a case a while ago of an asparagus grower who paid his workers by the kilo of product picked. This is, of course, seasonal work and all his workers were East European. He was persuaded to take on some local unemployed as a trial.

The EE workers were all earning well above the minimum wage, calculated by dividing their gross earnings per day by the number of hours worked; in fact, the grower was only vaguely aware of MW legislation. The locals were being subsidised by a government subsidy for the first month but then the problem started. Locals were very slow and stopped for frequent breaks. In fact they were cutting half the amount of aspagus than the EE workers which meant that the grower had to make their wages up to the minimum. This meant that the product they cut was costing him twice as much as it should - by by locals.

19

I remember a Business Week article back in the 1980’s about US businesses expanding into Europe (Western). One main point of the article was that many European countries had a different attitude toward firing workers - i.e. very difficult and expensive. Rather than allowing you to fire unproductive workers, often “letting them go” meant paying wages for an extended period if you could fire them at all. The attitude was more like “if they can’t do the job, you should have known that when you hired them.” Italy was cited as an extreme example - some workers figured out the system and simply stopped being productive hoping for a nice payout. I assume things have changed a bit since then.

(Canada has sort of a mid-way version. If you lay off someone non-union without cause, you will pay between 2 weeks and 2 years depending on various factors - age, length of service, how specialized the job is and current job market, etc.)

But pretty much every government has seen the tricks that employers will pull, and labour standards basically say the same thing - you must in the end pay at least the minimum hourly wage…

20

It is, it would seem, a lot harder to fire an employee in Europe generally than in the USA. In the UK, there is a whole process that must be followed and documented before you can fire anyone for anything other than gross misconduct (stealing or fighting etc.). It actually works fairly well; employers know the rules and, for the most part, stick to them to avoid expensive legal challenges. It is hard for an employee to ‘game’ the system, but it does happen.

A few years ago a case hit the news where a young woman applied for a job at a holiday park. This was a small business run by an elderly couple, and they were specifically looking for someone to help with the heavy lifting, especially gas bottles. Soon after she started work the woman announced that she was three months pregnant and could not do any heavy lifting, so she was promptly given notice. She challenged this on the grounds of discrimination and won her case. This meant that not only could she avoid heavy work, but once the baby appeared, she could take a year off, some of it paid, and have the job kept open if she wanted to return.