An hourly employee is a person whose wages are based on the number of hours they work.

Many hourly employees perform manual or physical jobs, such as working in construction. Others work in retail or beauty industries.

Hourly employees typically receive a pre-arranged rate per hour. However, the Fair Labor Standards Act requires you to pay at least time and a half for any hours worked above 40 per week. Hourly employees may also receive a higher rate for working during public holidays or unsociable hours.

If you have hourly employees within your business, they will be entitled to federal and state minimum wages.

An hourly employee will normally need to keep a record of their hours worked through time cards or time sheets.

How to Calculate Wages

You can determine an hourly employee’s wages by multiplying their hourly rate by the number of hours they have worked.

Imagine you pay an employee $20 per hour, and they have worked five hours in a week. You would pay your employee $100 for their week’s work—$20x five.

Imagine the same employee works 50 hours during the week. You will need to pay the employee the following:

  • $800 for their 40 hours worked—40x$20
  • $300 for their overtime—10x$30

In total, the employee would earn $1,100.

Hourly vs Salaried Employees

When you are running a business, it’s crucial to understand the legal difference between salaried and hourly employees.

Because the amount an hourly employee earns depends on the time they have worked, their wages can vary each week.

Salaried employees typically receive the same amount for every wage period, regardless of hours worked. Their earnings will only change if they receive an increase—or decrease—in their annual salary.

Exempt vs Non-Exempt Employees

Under US labor laws, employees fall into two categories: exempt and non-exempt. This categorization largely refers to whether an employee is exempt from receiving overtime pay or not. Understanding the difference between exempt and non-exempt employees is crucial to working out pay and compensation for your workers.

Non-exempt employees

In most cases, an hourly employee will be a non-exempt employee. A non-exempt employee is an individual who receives both overtime pay and minimum wage. An employee is typically regarded as non-exempt if their annual salary would be less than $35,586.

You can calculate an hourly employee’s annual salary using the formula below:

  1. Take their hourly wage and multiply it by hours worked in a week
  2. Multiply the figure above by the weeks worked per year—exclude weeks in which your employee doesn’t work

Take the example of an hourly employee who earns $15 per hour and works 15 hours per week. Also, imagine this employee works 48 weeks per year.

Their weekly wage would be $225—$15 x 15 hours, and their annual salary would be $10,800—$225 x 48 weeks.

Read our article to learn more about calculating hourly wages and annual salaries.

Exempt employees

In most cases, salaried workers are classed as exempt employees. As such, they are not legally entitled to the minimum wage or overtime. These individuals often have professional or office-based roles.

Although you may choose to pay your exempt employees overtime, there is no legal requirement to do so.

Read our article on exempt vs. non-exempt employees to learn more.

Minimum Wages

As already discussed, you must pay your hourly employees the minimum wage or above. How much the minimum wage is will depend on the state in which your business operates. You can check The US Labor Department’s website for information on the minimum wage in your region.

Note you will need to pay your hourly employees whichever is the highest of the state or federal minimum wage—$7.25 per hour.

Number of Hours Worked

There is no specific law regarding the maximum number of hours an hourly employee can work per week. However, federal law states that you must pay these individuals overtime for any time they work above 40 hours per week.

The IRS will usually define a person as working full time if they are on duty at least 30 hours per week or 130 hours per month.

Hourly Employees and Benefits

If your employee works on a full-time basis, they are normally entitled to company benefits. 

Like the IRS, the Affordable Care Act defines an hourly employee as a person who works at least 30 hours in a working week. Under the act, you will need to provide affordable health coverage to your staff if you have 50 or more full-time employees. 

While your package for hourly and salaried employees may depend on your budget, common benefits include paid time off, 401k matching, gym memberships, and mental health support.

Note you may be more likely to attract top talent to your company if you offer an attractive benefits package.

Pros of Hiring Hourly Employees

Employing staff on an hourly basis has several advantages for both businesses and employees.

Avoid wasted labor costs

As you pay hourly employees for the number of hours worked, there is less chance that you will be paying employees when there is little or no work. If your business is less busy at certain periods, you can arrange for fewer people to be on shift at this time.

Better work/life balance

Depending on your employees’ personal commitments, they may prefer the flexibility of hourly employment. For instance, someone with a family may find that hourly employment gives them the freedom to manage work and childcare. 

Greater earning potential

If an employee works beyond 40 hours per week, they may be able to earn more on an hourly wage than a salary. 

Cons of Hiring Hourly Employees

Before you hire employees on an hourly basis, you should consider the potential downsides, both for your business and your staff.

More uncertainty for employees

As an employee’s wage fluctuates, they may find it more difficult to budget and could struggle to meet expenses.

Likewise, an employee in a seasonal industry such as construction may find their wage drops significantly at certain times of the year. People employed on an hourly basis may also worry that they are at greater risk of being laid off or having their hours cut than salaried employees.

Lower employee retention

The lack of certainty over hourly wages may prompt some employees to seek a position that offers them a set salary. Low staff retention can lead to an increase in recruitment and training costs.

The Risk of Misclassification

When you’re running a business, it is essential that you correctly classify your hourly and salaried employees. Should you make a mistake, you could face serious legal and financial consequences.

For example, you may be subject to legal action from your employees. Likewise, you may need to reimburse your staff for unpaid overtime or paid time off they were owed.

Conclusion

The question of whether to pay your employees on an hourly basis may—at first glance—appear simple. However, there are multiple legal factors you will need to consider. 

Following the tips in this article should help you decide if your employees should be classified as hourly or salaried workers. However, if you are uncertain, you should seek the advice of a legal expert specializing in labor laws.

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