The Advantages & Disadvantages of Hourly Wages
The two main categories of employees are salaried and hourly wage workers. Employers usually classify non-management positions as hourly wage roles. Salaried employees earn a set pay per week or per month, regardless of how few or how many hours they work. Hourly employees earn pay only for the number of hours they work. This method has advantages and disadvantages for employer and employee.
Hourly Workers Earn Less
Hourly employees generally earn significantly less than their salaried counterparts do. This is not great for the employee, but it enables the company to achieve its goals at a lesser cost. The exception would be hourly wage employees who are better paid and consistently work overtime hours. However, even then, an employee who earns an hourly wage of $9 would have a 1.5 time overtime pay rate of $13.50. This is likely to be much less than what the company would pay a salaried manager.
Overtime Pay Guaranteed
Overtime pay is a right guaranteed by the Fair Labor Standards Act of 1938. Other rights this law guarantees to covered American employees include:
- The right to earn at least the federal minimum wage, which is currently $7.25 per hour
- The right to earn an equal wage to other employees performing the same work, regardless of sex
The Fair Labor Standards Act does not apply to every worker in the United States. A few notable exceptions include:
- Seasonal farm workers
- Highly compensated executives
- Independent contractors
As an employer, you must take care not to miscategorize a covered employee as an independent contractor. This means that the employee will lose the rights afforded by the Fair Labor Standards Act as well as other employee protection laws, like Title VII of the Civil Rights Act of 1964, and the employer can face legal penalties.
Problem of Perception
Businesses often perceive hourly workers as less valuable, and easier to replace, than salaried workers which may or may not be true. Conversely, low-paid employees may be less motivated to stay with the company once they achieve a higher level of expertise. The loss of knowledgeable and experienced employees results in lower productivity and possibly lowers profits for the company.
Reduced Benefits Package
Businesses offer hourly employees a reduced benefits package, compared to what executives receive. Hourly employees pay toward their health insurance premiums and may have a lower-quality healthcare plan that limits doctor options and patient choices. Some companies give hourly employees only one or two weeks' vacation each year and may restrict the available dates. The lesser offerings to hourly workers save the company money only if they can retain their staff; recruitment and training of replacement employees cut into any potential savings.
Contracts for Hourly Workers
Unlike their European counterparts, hourly employees in the United States rarely have work contracts, especially in states with right-to-work laws. While state and federal laws regulate safety conditions, minimum wage, abuse, unpaid work and other employment situations for hourly employees, these employees can be dismissed without cause regardless of their length of employment. The reverse is also true: Your employees can quit their jobs without giving notice, resulting in a negative impact on your company.
Less Job Security
Hourly employees may feel less secure in their jobs, especially if you schedule full-time workers for less than 40 hours. While managers earn the same amount of money regardless of company slowdowns, hourly employees suffer when they work fewer hours. The company saves money by not paying them when there is no work to do, but it also takes the chance that another business will hire away its most talented workers.