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. The other common method is to pay the employee a salary, which is a set amount, no matter how many hours are worked.
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 higher pay offered for specific shifts.
Hourly Wage Compared to Salary
The main difference between hourly wage and salary is that an hourly wage pays only for hours actually worked, while a salary is a set amount not dependent on hours worked. 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
Paying an hourly wage can increase flexibility and cost savings for employers. Employers gain flexibility in staffing decisions when staffing hours need to be increased or decreased in smaller increments that don’t justify adding another full-time employee. It is easier to take on seasonal or extra staff knowing that payment is only due for the hours actually worked.
Some employees also may prefer the flexibility that comes from an hourly wage role. Hourly wage roles are more likely to offer options to employees who want to work limited hours, work only outside traditional work hours, or who want the option to trade work shifts with other employees.
Employer cost savings can be realized through the application of incentive pay and maintaining a larger part-time workforce. Incentive pay refers to applying a pay increase only on unpopular shift hours without raising pay across the board. For instance, an employer might pay nursing staff incentive pay for overnight hours worked without raising pay for all staff hours.
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
The main disadvantage of paying an hourly wage is how unpredictable this can make budgeting for employers. Salaries are set amounts that can easily be forecasted in budgets. By contrast, hourly wages can be subject to unexpected swings in hours or increased overtime pay. These fluctuations can be combatted by training managers to track employee hours each week against staffing plans and discourage unapproved overtime.
The cost savings of paying an hourly wage through targeted incentive pay or part-time hours can backfire if it leads to excessive employee turnover. Employers should be mindful of competitors offering higher overall pay or health insurance to part-time employees and be ready to reevaluate pay practices if it becomes necessary to make changes to retain staff.
Legal Requirements That Impact Hourly Wage Decisions
Whether an employee should be paid an hourly wage is determined in part by employer and employee choice, 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 via salary and most employers will choose to pay them on a salary rather than on an hourly wage. Salaried employees often work more than 40 hours per week but do not accrue overtime pay for these additional hours. FLSA-exempt employees paid a salary also do not earn more than their salary even if their hours worked result in their equivalent hourly pay dropping 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. The employer also avoids accidentally not paying overtime when due because the employee’s hours are already tracked for regular pay calculation.
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 worked in a week.
Example: 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 = $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.
Example: 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.
Example: 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.
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.