What Is an Hourly Wage?

An hourly wage means an employee is paid an agreed rate per hour—or fraction of the hour—they work. Hourly wage is one of the two most common methods of calculating employee compensation. 

An employee’s hourly wage may vary for the different hours that they work. Reasons for the variation in wage include overtime, holiday pay, or additional pay. 

Hourly Wage vs. Salary

The main difference between hourly wage and salary is that an hourly wage is payment only for hours actually worked, while a salary is a set amount an employee is paid per year. An hourly wage may vary, while salary remains set.

Salaries are most often expressed as an amount paid per year. For example, an employee may be offered $45,000 per year for full-time employment. While full-time hours are the expectation from this arrangement, a salaried employee may work less or more than traditional full-time hours with no alteration in pay.  

Meanwhile, an hourly wage expresses just what it says: an amount paid per hour. For example, an employee may be offered $15 per hour for full-time employment. This employee will be paid that rate only for the hours that they actually work. The hourly wage is subject to increase for some of the hours worked based on factors such as overtime pay or incentive pay. 

Advantages of Paying an Hourly Wage

• Flexibility for employers: Hourly pay allows employers to adjust labor costs based on demand. They can schedule more hours during busy times and reduce hours when business is slow.
• Overtime pay for employees: In many regions, hourly workers receive overtime pay for hours worked beyond the standard full-time hours (e.g., over 40 hours per week in the U.S.), which can significantly increase their earnings.
• Clear compensation for work completed: Employees are paid for the exact amount of time they work, making it a fair system for those who may work less than a standard full-time schedule.
• Potential for reduced labor costs: Employers may save on labor costs during slower periods since they are not committed to a fixed salary regardless of hours worked.
• Attractiveness for part-time workers: Hourly wage jobs are often more attractive to part-time workers, students, or those seeking flexible work arrangements.
• Can be more cost-effective: It is also more cost-effective to maintain more part-time employees because the employer is not obligated to offer these employees health insurance. The Affordable Care Act (ACA) mandates that 95% of full-time employees must be offered health insurance if the employer has 50 or more employees. Part-time employees are not included in the ACA mandate. By maintaining a workforce of more part-time employees paid only for their hours, an employer avoids being obliged to offer health insurance to those employees.

Disadvantages Of Paying an Hourly Wage

• Lack of salary stability: Hourly employees have less predictable income, which can make budgeting and financial planning more challenging.
• Vulnerability to business fluctuations: In slow periods, hourly workers might receive fewer hours, directly affecting their income.
• Limited benefits and job security: Hourly positions often come with fewer benefits (like health insurance, paid time off, etc.) and less job security compared to salaried positions.
• Potential for unreliable scheduling: Schedules can be inconsistent and subject to change, which can be disruptive for employees’ personal lives.
• Less incentive for efficiency: Since pay is based on time rather than output, there might be less incentive for employees to work efficiently.
• Administrative burden: Tracking hours worked, especially for a large workforce, can be administratively burdensome and requires accurate timekeeping systems.

Legal Requirements of Paying Hourly Workers

Whether an employee should be paid an hourly wage is determined in part by employer, but most often, it is based on the legal status of the job. The Fair Labor Standards Act (FLSA) requires payment of overtime and payment of at least the federal minimum wage to any employee classified as non-exempt from the law’s requirements. For these employees, an employer will be required to track hours worked even when the employer and employee would prefer to calculate pay solely on a salary. 

FLSA-exempt employees can be paid with a salary, and most employers will choose to pay them this rather than an hourly wage. Salaried employees often work more than 40 hours per week but do not accrue overtime pay for these additional hours. Employees exempt from the Fair Labor Standards Act (FLSA) and receiving a salary do not earn additional compensation, even if the total hours they work reduce their effective hourly wage below the minimum wage.

The FLSA applies to most, but not all, employers in the US. The Department of Labor provides an advisor tool for determining whether it applies to your business. Many states also apply their own standards for when overtime must be paid beyond the provisions outlined in the FLSA. 

Overtime regulations apply in all states under the FLSA, but many states also apply their own standards for when overtime must be paid. Check your state’s labor office for guidance on the laws in any state where your business operates. 

As a result of overtime laws, employers often choose to pay an hourly wage to every employee who earns overtime even if they could otherwise be paid a salary. By paying an hourly wage, the employer maintains the benefit of only paying for the hours worked instead of a salary base plus overtime. By tracking an employee’s hours for the calculation of regular pay, the employer also prevents the inadvertent failure to pay overtime when it’s owed.

Converting Hourly Wage to Salary

When estimating the financial impact of an hourly wage employee’s income, it can be helpful to convert their wage into an annual salary equivalent. Here is how to do it:

• Multiply the hourly wage (including average overtime or incentive pay) by the number of hours or converted minuted worked in a week.

Example: An employee earns $16 per hour and works an average 3 hours overtime each week. Overtime pay equals 1.5 times the base rate. $16 x 40 hours a week = $640. $16 base rate x 1.5 = $24 (overtime rate). $24 x 3 hours overtime = $72. $640 regular + $72 overtime = $712 weekly wage

• Multiply the weekly wage by the number of weeks typically worked by the employee in a year.

The employee usually works 50 weeks per year. $712 x 50 weeks = $35,600 estimated annual salary.

Converting Salary to Hourly Wage

If job changes or a compliance audit uncovers a salaried employee who needs to be adjusted to an hourly wage, follow this calculation to determine their appropriate hourly rate:

• Divide the annual salary by the number of weeks per year.

Example: Employee earns $45,000 per year. $45,000 / 52 = $865.38 weekly rate

• Divide the weekly rate by the number of hours typically worked.

If the employee works 40 hours per week:$865.38 / 40 = $21.63 hourly wage

Note that any adjustments to an hourly wage must result in an hourly wage above the federal minimum wage to be FLSA compliant. 

Conclusion

Paying an hourly wage has both advantages and disadvantages for employers. It is important to remember that the choice to pay a salary instead of an hourly wage can lead to problems if you fail to comply with overtime laws. Savings and flexibility are highlights of paying an hourly wage that can benefit employers.