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Easier full-service payroll for small businesses

In HR, we often have to figure out whether an employee should be paid by the hour or by a salary. There are pros and cons to each, but it may be better to pay an employee by the hour under certain circumstances. In this article, we’ll help you determine whether you should pay your employees by the hour, and when it’s required.

What Are Hourly Wages?

An hourly wage is the compensation paid to an employee for one hour of work. Hourly wages generally remain consistent; however, employees can be paid higher hourly wages for overtime hours, holidays or unpopular shifts.

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Hourly Wage vs Salary

A salary is a set amount of money paid to the employee regardless of how many hours they work. Even though employees are usually paid once or twice a month, salaries are usually referred to by their annual total. For example, an employer may offer a salary of $50,000 per year.

Hourly wages are earned per hour, so how much money an hourly employee makes always depends on how many hours they worked, and may vary from paycheck to paycheck.

Advantages and Disadvantages of Paying by the Hour

There are both pros and cons to paying employees by the hour. Which route your company takes depends on your industry and your business strategy.

Hourly Wage Advantages

  • May be more cost-effective. Paying employees by the hour can save you money because you can schedule only the number of hours and employees you need. Hourly employees also typically cost less since they’re not eligible for certain benefits.
  • Employees may prefer the flexibility. Some employees prefer hourly wages because of the increased flexibility. For example, some employees may only want to work a few shifts, or only on weekends.
  • Easy to create pay incentives. It’s easy to create incentives for employees who are willing to work unpopular shifts or more than 40 hours a week. Employees are much more incentivized to work more when they’re guaranteed to make more if they do.

Hourly Wage Disadvantages

  • Wages are less predictable. Hourly wages fluctuate depending on how many hours your employees work. This fluctuation can sometimes be unpredictable, which makes it hard to anticipate overhead.
  • Can lead to more turnover. Hourly employees may decide to leave for  a salaried position so they can receive better benefits or because they want more pay security.

How to Know if a Position Should Be Hourly

Whether an employee should be hourly depends on state and federal wage-and-hour laws.  This doesn’t mean that you can’t pay them a salary; however, you’ll still have to pay them overtime for all hours worked beyond 40 hours in a week.

For this reason, companies often pay non-exempt employees on an hourly basis to avoid accidental violations. Below is some specific guidance to determine whether an employee should be hourly.

If FLSA applies to you and the position is non-exempt under FLSA, then it’s typically better to pay the employee  an hourly wage

First, determine whether FLSA applies to your company.

Then, determine whether the employee is non-exempt. This depends on:

  1. How much they make per year; and
  2. Their job duties
    • An employee is non-exempt if their salary would be less than $35,568 a year or if they do not meet the FLSA exempt job duty requirements.
    • If your state’s wage-and-hour law designates your employee as non-exempt.

State wage-and-hour laws may have different yearly earning thresholds or regulations that require employees to be paid hourly. If you don’t know which regulations apply in your state, contact your state’s labor office.

How to Convert Hourly Wage into an Equivalent Annual Salary

Step 1: Multiply the hourly wage by the number of hours worked per week.

The first step in converting an hourly wage to an annual salary is to multiply the hourly wage rate by the number of hours worked each week. If the employee typically earns overtime, include this as well.

Let’s say they make $22 per hour and work 40 hours every week.

Weekly Pay: $22 hours x 40 hours = $880 weekly pay

Step 2: Multiply weekly pay by the number of weeks worked in a year.

Once you have the weekly pay, multiply the weekly pay by the number of weeks worked in a year. There are 52 weeks in a year. However, if you know the employee will not work a given week, don’t include it.

Assume the employee worked 50 weeks a year.

Yearly Wages: $880 x 50 weeks = $44,000 yearly salary

In this example, the employee would make $44,000 a year.

Converting Annual Salary into an Hourly Wage

Step 1: Divide your annual salary by 52 weeks.

First, divide your annual salary by the number of weeks in a year: 52.

Assume your salary is $50,000 a year.

Weekly Pay: $50,000 / 52 weeks = $961.54

Step 2: Divide your weekly pay by how many hours you actually work per week.

Even though full-time jobs are supposed to be 40 hours a week, salaried employees often work more than that. Let’s assume you work 55 hours a week.

Hourly Wages: $961.54 / 55 hours = $17.48 per hour.

In this case, your hourly wage would be $17.48 per hour. This example shows why calculating your hourly rate can be disappointing. Employees often don’t realize how working more than 40 hours a week reduces their hourly wage rate.

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Questions You’ve Asked Us About Hourly Wages

Average hourly wages vary by industry and state. However, you can find national average hourly and weekly earnings by industry on the Bureau of Labor Statistics’ Economic News Release, Table B-3.

The most comprehensive wage-and-hour law is the Fair Labor Standards Act (FLSA). However, almost all states have passed state laws that further regulate hourly wages. Also, if your company is receiving certain funds from the state or federal government, you might be subject to prevailing wage laws, including the Davis-Bacon Act, the McNamara-O-Hara Service Contract Act, or the Walsh-Healey Public Contracts Act.

Natasha is a writer and former labor and employment attorney turned HR professional. Her experience as a litigator and HR trainer inspired her to begin writing about anti-discrimination laws in the workplace. As a writer at Eddy HR, she hopes to provide helpful information to both employees and HR professionals who need help navigating the vast world of human resources. When she’s not writing, you might find her cheering on the Green Bay Packers or hiking in the Northwoods of Wisconsin.

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