If you’re a small business owner, one of the first things you will have to decide is how to pay your employees. Will they earn a flat rate or an hourly rate? What do those terms even mean, and how will they affect your business? Which one will attract the most skilled employees?
In this article, we’ll discuss the differences between hourly rates and flat rates, the pros and cons of each, and when it might make sense to choose one over the other.
Let’s get started!
What is an hourly rate?
An hourly rate is a payment structure in which an employee is paid a fixed amount for every hour that they work. Hourly rates can be used for both full-time and part-time employees, and are often used in fields such as manufacturing, retail, and hospitality.
Hourly rates can offer several benefits for both employees and employers. For employers, they provide a clear indication of how much time an employee has worked, allowing easy tracking of hours worked and quick calculation of overtime payments.
For employees, hourly rates provide a predictable income stream and allow them to budget their time more effectively, knowing exactly what their commitment will be.
While they can provide some benefits, paying employees an hourly rate can also have some drawbacks.
It can be more difficult to budget for your business, since you may not know how many hours a project or assignment will take, meaning costs can quickly balloon out of control. There is also the ongoing debate about raising minimum wages, which means legislation can quickly disrupt your company’s payroll.
Employees may also feel less invested in the company if their pay is not directly related to the work they do, and is instead tied to a “clock in, clock out” system. There can be an incentive to work slower, especially if there is a possibility of overtime.
What is a flat rate?
A flat rate is a payment system where an employee is paid a set amount of money for each day or project regardless of the number of hours worked.
For some workers, this may be an advantage because it can lead to much higher wages if they can quickly move through projects. If you were paid a certain amount every time you create a W-2 form, knowing the perfect tool to use can increase your productivity and your earnings.
For employers, a flat rate may be more advantageous because it is simpler to calculate and does not vary with the number of hours worked. Even if a project is delayed or adjusted, a flat rate can help keep a budget intact.
Still, there are some drawbacks. For instance, if a project takes longer than expected, an employee may not earn as much money as they would with an hourly wage. This can lead to dissatisfaction on the part of the worker, and can also be challenging for employers who may not be able to accurately predict how long a project will take.
It can also sometimes lead to sub-par work, with the employee cutting corners and putting in a lower effort because they can make more money moving on to the next task.
For the employer, there can be many additional steps when offering a flat rate to an independent contractor or freelancer, like creating 1099 forms in addition to the payroll process.
How can I choose?
There are a few key things to consider regarding your business before you decide whether to offer a flat rate or an hourly rate to your employees:
What type of work do you do?
Tasks that are predictable and have a set scope (like writing or programming) lend themselves well to flat rates, while tasks that are more variable in nature (like hospitality or plumbing) can be better suited for hourly rates.
What is the skill level of your employees?
Flat rates are generally better suited for employees with more experience and expertise, as they can earn more money per hour by moving quickly through tasks. Hourly rates may be more appropriate for entry-level employees or those who are still learning the ropes.
How much do you need to charge to make a profit?
For every business owner, the ultimate decision should come down to the financial health of the organization. Even if it may benefit your employee to be paid hourly, a flat rate (or vice versa) may be more beneficial to ensure you make a profit at the end of the day.
For many workers, the knowledge that they have a stable job is more important than the way their pay is calculated.
Whether you end up paying a flat rate or hourly rate, remember to constantly monitor how it is affecting your bottom line, and be open to considering a change in the future. What works for your business right now might not work a few years down the road, so it’s important to always be evaluating and tweaking your policies.