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Hourly pay

Understanding hourly pay enables employers to ensure fair compensation, comply with labour laws, and effectively manage labour costs.

  • Hourly pay

  • Hourly employees

  • Reasons

  • How to

What is hourly pay?

Hourly pay refers to a system of employment that compensates workers based on the number of hours they work, rather than with a fixed salary. When working with hourly pay, both parties must agree on an hourly pay rate.

What is an hourly employee?

Hourly employees are different from independent contractors. A contractor tracks their own hours and invoices the employer each month or on the completion of a project. As contractors are responsible for filing their own tax returns, they must consider these costs when determining their hourly rate.

An hourly employee, on the other hand, is a contracted employee who gets paid based on the hours they work each week. Different from salaried employees, they usually use a timesheet or card system to track their hours each day. Employers have no obligation to pay hourly employees for any hours they did not work, whereas salaried employees receive a consistent sum each month. Conversely, hourly employees receive remuneration when they work extra hours, while salaried employees usually do not.

When deciding whether to contract out services or hire hourly employees, employers should consider the affordability of  and the . Contractor and employee relationships are very different in nature. Whether a business should hire independent contractors depends on their work style and company goals. Ensuring compliance is also an important consideration, as misclassifying an employee as an independent contractor can cause serious legal and financial consequences down the line.

Why do companies offer hourly pay?

Hourly pay can offer flexibility for both employers and workers. However, it can also mean less predictable payroll expenses or earnings each month. Some workers prefer an hourly structure, knowing they will receive proper compensation should they work additional hours or overtime. Contractors may also value maintaining high levels of control over how, when, and where they work. On the downside, contractors and hourly employees do not usually receive employee benefits and lack the security of receiving minimum earnings each paycheck.

When deciding whether to hire an hourly or salaried employee, companies should consider the nature of the work, the seniority of the position, and the available budget. Fixed salaries offer businesses predictable and consistent payroll expenses each month. Senior executives typically expect salaried positions with benefits, so companies may need to offer salaries to attract top talent. Positions with fluctuating demand that require an employee's physical presence may suit an hourly pay structure better, which can also save the employer money.

How do employers set hourly pay rates?

Employers must always adhere to minimum wage requirements when establishing the hourly pay rate of hourly employees. The rate may vary depending on the nature of the work, the skills and experience required, the location of the job, and the industry standards. Depending on the country and its legal working hours, hourly employees are also usually eligible for overtime pay if they exceed daily and weekly work guidelines. In the US, for example, most hourly employees receive overtime rates on any additional hours they work over 40 hours per week.

In most countries, hourly employees do not have a legal entitlement to benefits. However, depending on the country's employment laws and customs, employers may choose to provide certain benefits as a perk.

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