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Wage Rules: How Much Should I Pay My Employees?

Base pay is the number-one reason employees join and stay with employers, a recent study by Towers Watson reports. Clearly, “How much should I pay my employees?” is one of the most important questions any small business owner can ask. Here are 5 steps to paying employees appropriately while staying within your operating budget.

  1. Define the job. Start by writing a detailed job description that includes duties, skills and experience required. Job titles may not be accurate indicators of pay ranges; what a marketing director does, for example, can vary wildly from company to company or industry to industry. Writing a job description will help you make sure you’re comparing apples to apples when you research average pay (see Step 2).
  2. Investigate pay ranges for the job in question. Check out average pay rates for different regions and industries at the Bureau of Labor Statistics website, or Glassdoor. Use keywords from your job description to get as specific as possible. Specify your region; average pay for the same job can vary depending on the cost of living in certain locations or whether there are too few, or too many, qualified employees in the area. Look for low, average and high pay rates for a job, and create a pay range you feel comfortable with. This gives you the flexibility to offer candidates with more experience or skills higher wages.
  3. Know the difference between exempt and nonexempt employees. The Fair Labor Standards Act (FLSA), the federal law that regulates employment policies, recognizes two types of employees. Exempt employees are not subject to minimum wage or overtime pay laws; they must be paid a salary—a set amount of pay no matter how many or few hours they work. Nonexempt employees are entitled to minimum wage and overtime pay. They’re typically paid hourly, but some are paid salaries. For more information on determining if an employee is exempt or nonexempt, see this FSLA fact sheet.
  4. Understand the laws affecting your employees. The FLSA sets minimum wage and overtime pay standards. Currently, the federal minimum wage is $7.25 per hour. Many states set their own minimum wages—and employees are entitled to the higher of the two minimum wages. The Department of Labor Website has more information about minimum wage laws in each state.

– For nonexempt employees, overtime pay at a minimum of one and one-half times the regular rate of pay is required after 40 hours of work in one workweek. The Department of Labor’s Wage and Hours division has tools you can use to calculate hours worked and overtime. (Some states, notably California, require overtime to kick in at more than 8 hours worked in a day).
– If you want to pay employees, such as employees making craft items or garments, on a piece-rate basis, you can do so as long as the piece rate is at least equal to the minimum hourly wage rate (and overtime, if employees work more than 40 hours per workweek).
– If your employees regularly collect more than $30 a month in tips, such as bartenders, waitresses or hairdressers, you can count tips as part of their wages, but you have to pay a wage of at least $2.13 per hour and meet some other requirements in order claim a tip credit. (See this fact sheet for more information.)

5. Don’t forget the fringe—fringe benefits, that is. If you offer employee benefits such as health insurance, life insurance or a retirement plan, take the costs of providing these benefits into account. Their cost can equal 20 or 30 percent of an employee’s salary or wages.

“How much should I pay my employees?” is a question without a simple answer. Do your research and, if you have any questions or concerns, run your plans by an accountant and attorney familiar with tax issues and employment laws.

(Disclosure: GrowBizMedia writes occasional blogs for Glassdoor.)


Rieva Lesonsky

Rieva Lesonsky

Contributor at Fundera
Rieva Lesonsky is a small business contributor for Fundera and CEO of GrowBiz Media, a media company. She has spent 30+ years covering, consulting and speaking to small businesses owners and entrepreneurs.
Rieva Lesonsky