What is Pay Rate? A Beginner’s Guide

If you run a business, you’re going to need to know how to answer the question, ‘What is the pay rate?’. And of course, this isn’t as simple as saying, ‘This is your hourly rate.’ A pay rate has more variables—especially if you work in an industry that has tips and bonuses. In this article, we explore what a pay rate is, what types of pay there are, why you even need to know this, and how to calculate the rate of pay. Grab your favorite beverage, your favorite calculator (ours is purple!), and let’s go.

What is ‘Pay Rate’?

Pay rate refers to the monetary compensation an employee receives for their work. Basically, it’s how much money your employees get for the work they do—which can include different types of pay like overtime, tips, and bonuses. This rate of pay is going to be a big part of an employment agreement. Many peoples’ rate of pay can be higher or lower based on the work they do, the experience they have, and the industry they work in. Also, depending on the industry, employees can have different rates of pay depending on the work they’re doing. That’s a lot to think about. Good thing you’re here.

What are the Types of Pay that can be Included in Pay Rates?

So, what is pay rate exactly? Let’s break down the different types of pay that can be a part of an employee’s pay rate.

1. Regular rate of pay

The regular rate of pay is what we all know and love. It’s the standard hourly wage, weekly, or monthly wage an employee earns for normal work hours. It's the base pay rate before you add in things like overtime, bonuses, or tips. This rate is particularly important because the Fair Labor Standards Act enforces a minimum legal hourly wage for each state. For hourly employees, it's a fixed hourly wage. For salaried employees, it's their salary divided by the number of working hours in a pay period. As an example, if you run a daycare, each employee will have an hourly rate that needs to be the minimum wage for your state or higher. Your employees will receive that rate for every hour they work.

2. Commissions for sales

Commissions are additional payments based on a percentage of sales or even a specific achievement. They can vary from paycheck to paycheck depending on an employee's performance. Some industries don’t offer an hourly wage—just commission. The main thing to know is that the minimum wage rate still applies. So let’s say you run a shoe store and your team gets paid a commission for every sale. If an employee happens to have a slow month, you'll still be responsible for paying them a wage equal to the minimum wage for their hours worked. For example, if the minimum wage of your state is $9 per hour and your employee works 10 hours in a week—but doesn’t sell a single pair of shoes—the law says you'll still need to pay them $90 for that week.

3. Tips for a job well done

Tips are one of the main reasons people work in the hospitality industry. They're commonly paid out by customers as a ‘thank you’ for doing a good job—and they can really boost someone’s income. Restaurants, hotels, salons, delivery people, and coffee shops are the most common industries where tips are expected. If you run a restaurant, your employees will get paid tips from your customers. Your employees can either leave for the night with cash in their pockets or you can pool tips by collecting them, dividing them out equally based on who worked that night, and then include it in their paychecks. Just a note that tips are taxable: you don’t want to get a big scare at tax time.

4. Overtime pay

Overtime pay is for hours worked beyond the standard workweek or workday—usually 40 hours per week. Any hours worked above and beyond that 40 hours is going to be paid out at time and a half times the regular rate of pay. If you run a construction company and have a big project that needs to be done by a certain date, you may find you run into overtime hours to get the job done on time.

5. Bonuses as a reward

Bonuses are usually offered to employees as a reward for reaching big goals. They can be offered for many different reasons and many different timelines. But overall, they’re used to financially motivate your employees. Bonuses can be a percentage of sales or a fixed amount. So, if you run a retail store and set a daily sales goal that your employees reach, you can offer them $3 per hour bonus. This can be win/win for you and your team. Understanding all of these types of pay rates is important for every employer. But why?

Why Business Owners Need to Know What the Pay Rate is for Their Employees

Why would an employer need to know the pay rates for their employees? So many reasons. Let’s take a look.

1. Compliance and legal requirements

There are so many labor laws and regulations. But understanding minimum wage laws, overtime rules, and employee classification should be at the top of your list of laws to know. Underpaying or making payment errors can lead to lots of trouble in the future—and lots of money lost. Whether it’s taxes on tips, overtime pay, or paid time off, your employees expect you to know the ins and outs so their paychecks reflect their hard work.

2. Employee attraction, retention, and satisfaction

Employees are on the hunt for competitive pay. If you want to fill your team with stellar employees, knowing what a competitive pay rate is can help. It also makes sure that your wage promotes equity and fairness in your industry Once you get those employees through the door and on the floor, how do you keep them? Offering tips and bonuses are known to increase productivity and retain employees. Knowing this allows you to design incentive programs or bonuses to boost productivity—boosting profits.

3. Managing the budget

Times are tight for many businesses. Your budget needs to be on point. With labor being a massive part of a businesses overhead, knowing everyone’s pay rate means you can keep an eye on your margins. When it’s a slower time of the year, you can calculate how many employees to have on board and their rate of pay. And when times are busy, you can forecast how many more hours and employees you can add. This financial forecasting helps you stick to your bottom line while also keeping customers happy. Sticking your head in the sand around anything money related in your business is, well, a bad idea. But now you’ve got some concrete reasons you should know the rate of pay of your employees—both to their benefit and yours.

Calculate the Rate of Pay

You know the ‘what’ and the ‘why’: now let’s move on to the ‘how’. Calculating the rate of pay is relatively easy, you just need to make sure you have all of the pieces of the equations. We'll show you how with an rate of pay example.

What's the pay rate timeline?

You need to figure out what the timeline is for the pay rate. Do you want to calculate the pay rate of an employee for the week? A month? The year? Example: Let’s calculate the rate of pay for an employee during the busy holiday season at a retail store. Our timeline will be from December 1st to December 31st.

How many hours did they work during that timeline?

Now you need to add up the total amount of hours your employee worked during that timeline. Example: From December 1st to December 31st the employee worked 132 hours.

Add up the totals of the types of pay the employee earned

In order to figure out the full pay rate for an employee, you’re going to have to add up all of the totals of the types of pay earned during that time period. Example: Employee hourly rate = $13/hour x 132 hours worked = $1716 Bonus earned = $4/hour bonus for 50 hours worked for beating sales targets = $200 Employee commission earned = $400 total on sales Employee overtime hours = 5 hours at overtime rate of $19.50 = $97.50 $1716 + $200 + $400 + $97.50 = $2413.50

Calculate the final pay rate per hour

Now it’s time to put it all together and get the final pay rate per hour. Example: Total pay of $2413.50 / 132 hours worked = $18.28 final pay rate per hour You did it! Now you know the final the final pay rate per hour of your employee. You can use this information to let them know how those bonuses added up, to entice potential employees to come work for you, and to make sure you aren’t below state minimum wage.

Homebase Helps You Keep Track of Pay Rates

Homebase can make pay rates easy. We help you calculate and keep track of every type of pay your business offers and the final rate of pay for your employees with their payroll tool. Get started today.