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Hourly Employee

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What is an hourly employee?

An hourly employee is a staff member who is compensated at a specific rate for every hour they work rather than receiving a fixed salary. This means their earnings are tied directly to the number of hours they clock in.

Unlike most salaried employees, hourly workers are typically eligible for overtime pay when they work beyond the standard full-time hours defined by relevant labor laws and company policy. For HR, accurate tracking of hourly employees is crucial for proper compensation and compliance with labor regulations.

Hourly vs. salaried employee

The table below will help you understand the distinctions between hourly and salaried employees:

Hourly employee
Salaried employee

Compensation structure

Paid a specific rate for the hours they work.

Paid a fixed amount per pay period (e.g., biweekly or monthly).

Overtime eligibility

Usually eligible (typically at 1.5 times their regular rate) for hours worked beyond 40 in a workweek.

Generally not eligible, but this depends on job duties and salary level (exempt versus non-exempt).

Tracking time 

Required to track and record all hours worked.

Typically not required. The focus is on completing tasks and responsibilities.

Schedule flexibility

The schedule may be more flexible, depending on the role and employer.

Fixed schedule to fulfill job duties (e.g., the same eight hours every weekday).

Pay consistency

Pay varies depending on the hours worked each week.

Receives consistent pay regardless of the actual hours worked.

Common roles 

Retail staff, customer service representatives, and manual laborers.

Managers, executives, and professionals (e.g., accountants, engineers).

Do hourly employees get benefits?

Full-time hourly employees may receive comprehensive compensation packages, including health, dental, and life insurance, paid time off (PTO), retirement plans, and even performance bonuses. The Internal Revenue Service (IRS) defines full-time status for hourly employees as working an average of 30 hours per week, or 130 hours in a calendar month.

Under the Affordable Care Act (ACA), employers with 50 or more full-time equivalent employees must offer them affordable health insurance, whether hourly or salaried. However, exceptions may exclude certain seasonal workers. The IRS also doesn’t differentiate between hourly and salaried employees regarding benefit eligibility.

HR tip

While hourly roles often provide the benefits or flexibility, you should strive to ensure your scheduling practices are as fair and predictable as possible. Unpredictable schedules can negatively impact employee morale and retention. Avoid this by providing advance notice of schedule changes, and give your hourly employees a degree of control over their schedules.

Do hourly employees get paid holidays?

Federal law in the US does not mandate paid holidays for hourly workers, and the Fair Labor Standards Act (FLSA) stipulates that employers are not required to provide pay for time not worked, including holidays. However, certain exceptions apply to employees on government contracts

While not legally mandated, union or collective bargaining agreements can secure paid holidays for hourly workers. In such cases, the terms of the agreement will dictate which holidays are paid, as well as any eligibility requirements. Additionally, employers may choose to offer paid holidays as part of their benefits package, even if it’s not legally required. 

Do hourly employees earn overtime?

Generally, hourly workers in the U.S. are entitled to overtime pay. The FLSA mandates that non-exempt hourly employees qualify for time and a half for any hour they work beyond the standard 40 hours per workweek.

Additionally, remember that overtime laws can also be different from one state to another. For instance, California not only requires time and a half for hourly workers who work over 40 hours a week or eight hours in a single day—it also requires double time (two times the hourly wage) for hourly workers who work over 12 hours in a single day.

When managing hourly employees, especially in a business with a multi-regional or international footprint, it’s essential to comply with both federal and applicable local state overtime regulations to ensure legal compliance and fair compensation practices throughout your organization.

Learn to handle different compensation types skillfully

Develop the necessary skills to handle different types of compensation for different employees — whether hourly, salaried, full- or part-time.

AIHR’s Compensation and Benefits Certificate Program teaches you the various aspects of pay (e.g., base and variable pay), how to budget for salary cost, pay terminology, and how to motivate teams with effective and impactful pay structures.

How to calculate hourly employee wages

To calculate wages for an hourly worker, use the following formula:

Hourly employee wage = Hourly rate × Total number of hours worked

For example, if the employee’s rate is $20 and they work 40 hours a week, their gross weekly wage would be:

$20 hourly rate × 40 hours worked = $800

If the same employee works an additional two overtime hours at time and a half in one week, their weekly pay would be calculated as follows:

Hourly employee wage with overtime = Gross weekly wage + Overtime pay

In this employee’s case, their overtime pay is:

($20 hourly rate × 1.5) x 2 hours overtime = $60

As such, their hourly employee wage with overtime for one week is:

$800 gross weekly wage + $60 overtime pay = $860

HR tip

Misclassification of hourly employees can lead to significant legal and financial repercussions for your organization. Schedule periodic reviews of your workforce’s job duties and responsibilities to ensure you’ve accurately classified your team as either hourly (non-exempt) or salaried (exempt), in line with FLSA regulations.

Hiring an hourly employee: Pros and cons

Below are some pros and cons of hiring hourly employees. Consider this when managing diverse staffing needs, workforce impact, and organizational costs.

Pros

  • Cost flexibility: Paying only for hours worked offers more budget flexibility, meaning you can more easily adjust your workforce needs based on demand, and lower costs in slow periods.
  • Scalable workforce: Hiring hourly employees allows you to expand or contract your staff base for seasonal or project needs without the long-term commitment of salaried roles.
  • Easier overtime management: Calculating non-exempt overtime is typically more straightforward, which helps you simplify your company’s compliance adherence and budgeting practices.
  • Simpler benefits administration: They may have different or fewer benefit requirements, potentially lightening your administrative burden and reducing your organization’s costs.
  • Trial periods: They can be hired on a trial basis before employers decide whether or not to commit to a permanent employment arrangement.

Cons

  • Higher turnover: Hourly roles may see more turnover than salaried roles, increasing your recruitment and training costs and potentially disrupting productivity.
  • Less loyalty: They may feel less invested in your organization than your salaried staff, who tend to enjoy more job security and greater career growth potential.
  • Variable costs: Unlike predictable fixed salaries, hourly labor costs fluctuate with workload, which can complicate budgeting.
  • Limited availability: Depending on the skills you need and your local market, you may struggle to find qualified hourly candidates, especially if your schedules are inflexible.
  • Legal compliance: Failing to track hours accurately, overtime, and minimum wage for hourly staff exposes your organization to serious legal issues and costly penalties.

FAQ

What is an example of an hourly employee?

An example of an hourly worker would be a retail clerk who is paid $15 per hour for every hour they work. 

What is the difference between a salaried employee and an hourly employee?

An hourly employee is paid a specific rate for every hour they work, and is typically eligible for overtime pay. Conversely, a salaried employee is paid a fixed wage per pay period and is typically not paid extra for overtime.

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