Hourly employees: Understanding the ins and outs of compensation
What compensation structures are typical with different types of jobs? What are the pros and cons of an hourly pay structure? Do hourly employees receive benefits?
The vast majority of US workers are paid by the hour—59% total to be exact. Consider all the jobs that exist in healthcare, transportation, construction, retail, hospitality, and other large sectors, most of which is shift work that’s paid on an hourly basis. As a result, the laws and standards that govern this category of employees impact so many, particularly for younger women just entering the workforce and even more for mature women as they evolve throughout their careers.
How is compensation determined?
Hourly compensation is determined at the time of hire as a defined condition of the position along with other parameters, including the number of hours that will be worked in a week, and the logistics of days and times to be worked. In many cases, hourly workers will take on a varied schedule, meaning it might change from week to week, including the days of the week that are worked, time of day, etc. (e.g., nurses trading shifts). In many cases, hourly jobs are those that require the worker to physically be in a certain location for the job to be done—e.g., cashier in a grocery store, flight attendant on a plane, construction worker on job site.
From a human resources standpoint, the status of hourly employees is categorized as non-exempt, meaning they qualify for overtime under the Fair Labor Standards Act. This law dictates that employers must pay hourly employees one-and-a-half times their base rate of pay when they work more than forty hours in a given week.
Furthermore, hourly employee compensation is also guided by minimum wage laws and amounts. The Federal minimum wage rate is currently $7.25/hour, but that amount is subject to change and has over time as the goal is to keep the rate in line with the rate of inflation, which is calculated based on the Consumer Price Index (CPI).
Beyond the federally defined minimum wage laws, each state in the US has its own minimum wage, which might exceed the Federal amount, and does in many cases. Washington state, for example, currently has the highest minimum wage at $11.50 while California and Massachusetts have both reached the $11.00 benchmark as well. The exact amount defined by state can be accessed through the Labor Law Center Minimum Wage Rates by State. In most states, a subset of jobs that are tip-driven (e.g., bartending) don’t have to be paid the minimum wage, but the rules around this exception vary by state, so it’s best to explore the specific laws that govern how things are done locally.
Do hourly employees receive benefits?
Hourly employees can qualify for benefits, particularly health and dental insurance. The Affordable Care Act passed in 2015 mandates that organizations with greater than 50 employees provide benefits to their workers who are full-time or pay an assessment to the Federal Government of $2,000 per full-time employee, excluding the first 30 workers. Full-time work is defined as greater than 30 hours a week or 130 hours a month on average. Some employers outside of those parameters (i.e., with less than 50 employees and/or for employees working less than 30 hours a week on average) might opt to offer benefits to workers, but it is not required by law. Meanwhile, the law requires that employers treat all workers within a given classification consistently.
Additionally, because hourly workers are paid based on the time that they actually work, they do not qualify for paid vacation. While many long-time workers might be hourly, nearly all short-term employees are—think job at the mall over the holidays or waitressing job while you’re going to school.
What happens when you’re fired?
All hourly employees in the US are “at will,” meaning they can be let go or terminated at any time for any reason (e.g., business needs to cut costs, performance, bad personality fit with the owner, etc.). Typically, no severance is paid to hourly employees, particularly those who are part-time, but long-term, full-time employees are often provided some sort of severance pay (i.e., two weeks of pay) and access to COBRA, or the opportunity to keep health insurance by paying for it out of pocket yourself.
Netting it all out
The benefit of hourly employment is that it can enable flexibility around the amount of time and the schedule of the work, which can be a big advantage to accommodating families or getting paid while going to school. Meanwhile, the benefit to employers is the opportunity to vary labor cost or salaries with the need for those workers over time (e.g., increasing staffing at toy stores during the holidays or expanding emergency room staff on Friday nights). This arrangement also enables employers to keep costs down in other ways, as hourly employees typically have fewer ancillary benefits related to insurance, bonus compensation, 401(k) contributions, and paid time off. Furthermore, the opportunity to pay employees only for the actual time worked vs. being locked into a constant payroll cost, even when business might vary or slow over time, can be critical to ensuring the long-term economic viability of certain types of firms.
The compensation comparison: Hourly vs. salaried vs. consulting structures
Now that we have a basic understanding of hourly structures, we wanted to provide a framework for netting out the various terms and conditions of hourly, salaried, and consulting structures side-by-side to clarify the tradeoffs and make it easier to assess what might make the most sense for your unique situation.
What might make great sense at one stage of your life might make absolutely no sense at another phase. The key is to evaluate your life outside of work, your career goals, and the arrangement that will give you the most of what you need overall—in that moment and as a stop in your broader career journey.
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Alexis Harding is Women at Work’s resident HR expert. A long-time HR professional based in the Boston area, Alexis has rich experience in the HR departments of several large institutions over nearly two decades. She is here to engage with your questions about a range of topics that might be impacting your career and your overall success.
Christina Van Houten is the founder of Women at Work. Based in Boston with her husband and two teenage sons, she has spent the last 20 years of her career as a senior executive in the enterprise technology sector. Prior to evolving into tech, Christina founded a women's athletic apparel brand and served in several public interest roles focused on community and economic development. She started working at age thirteen and hasn't stopped since. She’s eager to help women find their way to the best possible life they can achieve.