Imagine that you’re so focused on growing your business that some can’t-miss tasks are falling by the wayside. If that sounds like you, then maybe it’s time to hire some help — and one of the key decisions you’ll make during the hiring process is determining their pay rate.
What you’ll learn
What you’ll learn
Updated: April 25, 2025
Key takeaways
- Small and medium-sized businesses (SMBs) can help attract employees by offering different pay rates, such as hourly or salaries.
- You may be require to pay overtime to non-exempt employees if they work more than 40 hours/week.
- Payroll complexity increases for hourly workers vs. salaried employees.
So, what is rate of pay? In short, it refers to how much an employee receives for their work over a specific period of time (one hour, one week, etc). Some businesses pay workers a set amount for each hour they work, while others provide an annual salary. The pay rate is part of an employee’s compensation package, which may also include benefits such as health insurance and vacation time. In this guide, we’ll talk about common pay methodologies, how they work, and standards to be aware of.
Core pay structures used by employers
Employee pay schemes typically fall into the following three categories.
Hourly pay
In an hourly pay structure, employees receive a specific amount for each hour they work. The pay rate stays the same for the pay period unless an employee’s hours cross the overtime threshold (typically more than 40 hours per week). Any overtime hours must be paid at least time and a half (1.5x) of a worker’s regular hourly rate. Hourly rates are common for many types of roles, including customer service and retail.
Salaried pay
Salaried workers receive a set amount of pay per year that employers divide across pay periods. If they’re non-exempt, they qualify for overtime if they work more than 40 hours a week. Exempt salaried employees don’t receive extra wages for overtime, regardless of whether they work more than 40 hours weekly.
Piece-rate pay
Piece-rate pay is standard in manufacturing industries and some types of gig work. This method bases pay on an employee’s output or how much they produce. For instance, a farmer might pay workers based on how many crops they pick or plant. Or a company might hire an independent contractor to finish a specific project and pay a flat rate for its completion rather than for the hours they worked.
Special considerations in pay structures
Pay structure can impact your company’s overtime and holiday pay obligations.
Overtime
Overtime laws apply to non-exempt employees covered by the Fair Labor Standards Act (FLSA). They entitle workers to receive time and a half for all time exceeding 40 hours in a standard workweek. However, the overtime rules don’t apply to employees with annual salaries above $35,568 who meet one of the exemption tests, such as administrative or professional workers.
Some states set the overtime bar a little higher than the federal government. For instance, Washington’s minimum salary for overtime exemptions is $1,332.80 per week for SMBs with fewer than 50 workers and $1,499.40 per week for larger employers. It’s worth checking your state’s overtime laws to see whether they differ from those set by the Department of Labor (DOL).
Holiday pay
Many private companies close their doors on federally recognized holidays like Christmas and Independence Day. It’s standard practice to compensate workers for the holiday, even if they don’t work. However, holiday pay isn’t required by law. Some companies that stay open on traditional holidays reward staff with extra pay. Although this is optional, it can make your business more attractive to talented workers.
Wage standards and eligibility
The federal government sets the minimum wage rate at $7.25 hourly. That’s the minimum you can pay most hourly employees for their work. However, the minimum wage by state can vary. For example, New York City’s minimum wage is $16.50. And in Arizona, it’s $14.70.
If a state or city’s minimum wage laws exceed the federal government’s, employers follow their location’s laws. Locations may set higher minimum wages to reflect their area’s higher cost of living.
There are a few distinctions between salary and hourly pay structures. Here’s more info to help you better understand how they work.
| Hourly wages | Salary | |
| Pay frequency | Usually weekly or bi-weekly | Usually bi-weekly, semi-monthly, or monthly |
| Overtime | Yes, if an employee works more than 40 hours in a week | Only for non-exempt salaried employees who work more than 40 hours in a week |
| Payroll difficulty | May require more work to track hours and process more frequent payrolls | Less frequent payroll runs may reduce administrative burden |
| Cost management | Easier to scale up or down workforce according to business needs | Not as much flexibility for managing labor costs |
| Benefits | Employees may qualify if they meet the hour requirement thresholds | Benefits eligible, which can attract skilled employees and reduce overall turnover |
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Compensation for different employee types
Some workers fit into non-standard employee classifications. Let’s look at two common ones.
Tipped employees
Hospitality organizations such as hotels and restaurants often hire tipped employees. These workers usually make an hourly wage but may also earn customer tips. Waitstaff, baristas, and bartenders often fall into this category.
The DOL defines a tipped employee as anyone who customarily earns more than $30 monthly from tips. The FLSA sets a different minimum wage for tipped employees, which is currently $2.13 hourly.
That might sound low, but it’s assumed that tipped workers will earn at least the minimum wage (and ideally more) when they account for their tips. Those who don’t can notify their employer, who is required to make up the difference so they make at least minimum wage.
Some states set a different minimum wage for tipped workers. If your state’s laws differ, you may need to pay higher wages to any tipped employees you hire.
Third-shift workers
Some businesses run a third shift overnight or on weekends. Since the time slots aren’t always the most desirable, companies may offer a shift differential pay rate to employees who work them. The differential increases pay for doing the same job on an alternative (and generally less attractive) schedule. Like other employee types, minimum wage laws apply.
If your third-shift workers are non-exempt, you’ll owe overtime for any hours they work beyond the standard 40-hour workweek. But no law prevents you from offering shift-differential pay rates, even if your regular team earns less per hour (no law requires it either).
Put understanding pay rates at the top of your to-do list
Planning pay rates can be exciting – it means your team is growing and your company is moving forward. That said, when you have a variety of non-exempt and exempt workers with different pay rates, or hourly employees taking on a variety of shifts, keeping track of it all can get complex.
A high-quality payroll platform can automatically calculate withholdings, deductions, and overtime pay so you can stay focused on building your team and growing your business. As you grow, best of luck connecting with job seekers who want to help you succeed!
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.