Pay rates 101: Understanding how pay is calculated in the workplace

Have you ever heard of the term “pay rate”? 

As soon as you enter the workforce, you start hearing about different terms employers and employees use to describe their work days, salaries, benefits, etc. It’s easy to get overwhelmed by the amount of info you receive. But, you shouldn’t give up! 

Learning about pay rates can be extremely helpful to you regardless of whether you’re an employee or you own a business.

So, today, you’ll learn more about:

• The definition of pay rate,
• The importance of learning about pay rates, and
• How to calculate your pay rate for a specific time period or project.

What does pay rate mean? 

Simply put, pay rate refers to the amount of money an employee or freelancer is paid during a specific time span.

In general, a pay rate consists of any kind of payment an employee or freelancer receive from an employer during a specific period. It typically includes:

• Wages, 
• Bonuses, 
• Commissions, 
• Overtime rates, and
• Other categories of compensation. 

The above are just simple and general definitions — it’s difficult to define pay rate in specific terms. That’s because this term does not have an official definition that’s accepted and recognized around the world. 

You may have to go through a few extra steps to understand what the pay rate means in your country. 

The United States, for instance, differentiates between the regular pay rate and the overtime one — and understanding this difference is essential when calculating your rates. 

If you want to figure out what pay rate means in your place of work, you can try finding out more info in your employment contract. After all, employment contracts tend to include various definitions relevant to the workplace, and pay rates may be one of them. 

In case you can’t find a detailed explanation, or your country does not have a specific legal definition of the term, you can think of a pay rate as we defined it above — the amount of money your employer is expected to pay you over a certain period of time, in any kind of payment. 

Now that we understand the basics, let’s see what are regular pay rate and overtime pay rate — as well as what is the difference between pay rate and bill rate.

What is the regular rate of pay? 

The regular pay rate is the total wage a worker receives during regular working hours, excluding overtime. The regular rate equals your wage. 

According to the Fair Labor Standards Act, the regular rate generally includes “all remuneration for employment paid to, or on behalf of, the employee.” The FLSA also states that the regular pay rate can’t be bypassed by any other agreement. Moreover, it can’t be lower than the minimum wage. 

The regular pay rate is always enforced and protected by the law. The US Department of Labor enforces federal minimum rate rules and rights, which are regulated by the Fair Labor Standards Act.

What are overtime and the overtime pay rate? 

Overtime refers to the number of hours worked beyond the normal, regular working hours, which usually means working over 40 hours per week. So, your overtime pay rate in this instance will be higher than your regular one. 

Under the Fair Labor Standards Act, unless exempt, overtime pay rate can’t be lower than time and one-half (1.5) the regular rate of pay for all hours worked over 40 hours during a workweek. For instance, if your hourly wage equals $7.25, your overtime hourly rate will be:

$7.25 x 1.5 = $10.88

Now, what about other countries around the world? Many countries in the European Union have a 50% pay rate rule for overtime. However, the regulations vary between countries.

Who is eligible for overtime?

If the law in your state or the contract of employment doesn’t get into specifics for these two types of pay rates, and you are eligible for overtime, you should take both regular and overtime pay rates into consideration when calculating your rate of pay. 

Unless exempt, every employee who works over 40 hours a week and whose earnings are less than $35,568 a year is eligible for overtime pay of one and a half (1.5) under federal law. You can get information on overtime exemptions in this Fact Sheet. 

The process of calculating your final rate could be a bit confusing. Therefore, keeping different kinds of rates in mind would make the process of calculating your pay rate much simpler for you. 

Pay rate vs. bill rate — is there a difference?

As we mentioned, a pay rate is the amount of money an employee or freelancer is paid over a certain period. 

On the other hand, a bill rate is the amount of money a professional or a company charges for their services per hour. Companies and self-employed individuals use bill rates to charge customers for their services. It includes the costs a company or a professional needs to cover in order to achieve the target income. Taxes, markups, and fees are then subtracted from the bill rate, to get the pay rate. 

In case you’re a freelancer or a legal professional, you will charge your client based on your billable hours — i.e. the number of hours you worked for which you bill the client. Billable hours always include hours spent working on a project for the client. On the other hand, non-billable hours present the time spent on tasks that are not invoiced and directly charged to the client. 

In case your bill rate is $200 per hour, your pay rate may be much lower and sit at $126. That’s because 30% ($60) of the bill rate went to taxes and 7% to the fees ($14). 

Staffing companies that match job candidates and employers frequently use bill rates. In this case, the bill rate will include the pay rate of a worker and the markup of that staffing agency. 

Why should you learn more about pay rates?

Learning about pay rates will be useful to you regardless of whether you’re an employer or an employee — and here’s why.

Why learning about pay rates is useful for business owners

Getting info about the pay rates in your area could help you offer better benefits to workers and predict future costs!

Reason #1: You’ll learn how to attract skilled workers

If you want skilled, hard-working employees who are constantly motivated, you need to offer them something they won’t receive anywhere else. The easiest way to achieve that is via competitive salaries. 

But, what happens when you hire seasonal workers, freelancers, or contractors? It’s pretty difficult to determine the competitiveness of your offer when you are paying someone based on the duration of a project or a specific goal. That’s where the pay rate comes in!

As you now know, a pay rate refers to earnings during a specific time period. The period in question is the one you’ll be able to determine on your own. So, it will be much easier for you to calculate the actual amount the worker will receive during a project or after completing a certain goal. 

Reason #2: You’ll learn how to keep employees motivated 

Another great upside to focusing on pay rates is that they typically include various benefits aside from employees’ hourly wages — such as bonuses. 

Benefits are sometimes equally as important as wages. Competitive pay rates will make you a more desirable employer as they allow you to include benefits aside from the hourly rate in your offer. As a result, you’ll be able to offer good workers something they won’t receive anywhere else!

Reason #3: Getting into pay rate details helps you plan future projects

Labor costs present a major part of project expenses. They include the sum of wages, taxes, and benefits that are paid to and for employees. 

Now, pay rates play an important role in labor costs because they can help you predict future labor costs for similar projects. For example, if you frequently work on similar projects of the same duration, you can use the info on pay rates from a previous project to calculate labor expenses.

Once you calculate labor expenses, it will be much easier to determine overall project expenses.

Why learning about pay rates is useful to employees

As an employee, you want to get paid fairly. Pay rates can help you negotiate the best deal and even predict your future earnings!

Reason #1: Researching pay rates helps you negotiate the best wage and benefits

Pay rates are more than a simple number to employees. 

They determine how much you earn during a certain period of time and how the job benefits and bonuses reflect your final earnings. Thus, they can really make a difference in your job satisfaction.

When it comes to wages, a good salary can significantly affect your motivation at work as well as the quality of your life. In addition, bonuses can motivate you to improve your performance. If your company does not offer them, you could end up earning much less money than your colleagues in the industry, even if your wage is higher. So, by learning more about pay rates and what they include in your country, you’ll save yourself a lot of frustration and confusion! 

As pay rates tend to include all the relevant earnings for a certain time span, they’ll help you determine where you stand compared to other similar or same positions in your industry. Once you get a clearer picture of your situation, you’ll be able to ask for a higher salary or additional perks your employer may be offering.

Reason #2: Learning about pay rates lets you predict your future earnings

Another essential aspect of learning about pay rates is the ability to predict future earnings. 

You have the ability to decide the time period you’ll be calculating your pay rate for. Therefore, you can easily predict your future earnings during a specific project, especially if you work on similar projects or your pay rate remains stable for a while

How do you find the rate of pay — a simple calculation with a real-life example

By now, you are already familiar with the fact that the term pay rate doesn’t have a recognized definition everywhere. So, the process of calculating pay rates and determining what to include in the calculation won’t be the simplest one. Luckily, we are here to make things so much easier!

Step #1: Determine the pay rate time span

The best way to make this calculation easier is to first determine the time period for which you want to calculate the pay rate. If you don’t have a time span in mind, you could try with a weekly pay rate. 

Alternatively, in case you want to calculate the pay rate right after a completed project, you can focus on the duration of that project only.

We’ll go into the calculation using two examples: 

• A freelance graphic designer who wants to calculate how much they should charge for a specific project, and 
• A business owner who wants to calculate a pay rate for a freelance developer hired for a project. 

Let’s say that you’re a graphic designer and you live in the United States. You want to calculate your pay rate for a specific project that lasted a week. Thus, you’d want to use a week as the time span for your calculation.

In case you’re a business owner, you can follow the example of calculating a pay rate of a freelance developer you hired for a week-long project. The developer works in the US and has 3 to 5 years of experience. 

Step #2: Include all the aspects relevant to the pay rate

Your next step will be figuring out what to include in your rate of pay calculation. 

Substep #1: Include your regular pay

To calculate your regular pay, you should start with the hourly rate. But, if you only have the info on your annual salary, you’ll first need to find the number of regular hours worked in a year. You’ll do that by multiplying the number of working hours per week by the number of weeks in the whole year. 

The number of working hours per week x the number of weeks per year = the number of regular hours worked in the year

Then, you should divide the annual salary by the number of hours worked in the year to get your hourly rate.

The annual salary / the number of hours worked in the year = the hourly rate

So, if your annual salary sits at $98,000, you’ll have to divide that number by the number of regular hours you worked in a year to get the hourly rate. That’s 40 hours per week times 52 weeks, which is 2,080 hours. 

$98,000 / 2,080 = $47.12

So, your hourly rate is $47.12 

Now, to calculate your earnings, you need to multiply the hourly rate by the number of regular hours worked:

Hourly rate x the number of regular hours worked = earnings

Let’s take a look at our examples. As a graphic designer in the US with one to three years of experience, you should be earning about $32 per hour. You worked 43 hours during the week, out of which 40 hours were regular and three overtime, which we’ll explain in the following subheading. So, the calculation for your weekly earnings based on your regular working hours should be:

$32 x 40 = $1,280 

Therefore, $1,280 are your weekly earnings.

An hourly rate of a freelance developer is around $62.4. They clocked in 42 hours a week while they were working on your project. Their weekly earnings from regular working hours are:

$62.4 x 40 = $2,496

Substep #2: Include overtime, if you’re eligible for it

If you’re eligible for overtime, you should include your overtime rate in the calculation. The overtime rate is different around the world. In the US, your rate should be one and a half times higher than your regular pay rate.

To calculate your overtime earnings, you’ll first need to find your overtime rate. Your overtime rate should be one and a half times your regular hourly rate. 

Regular rate x 1.5 = overtime rate

Then, you should multiply your overtime rate by the number of overtime hours you worked to get your overtime earnings:

Overtime rate x number of overtime hours worked = overtime earnings

In the case of a graphic designer who worked 3 hours overtime, your calculation will go like this:

$32 x 1.5 = $48

Your overtime rate is $48. Next, to calculate your overtime pay, you need to multiply your overtime rate by the number of hours you worked overtime: 

$48 x 3 = $144

When it comes to our second example, a business owner will have to pay a developer who worked on their project for 42 hours two hours of overtime. So, let’s calculate the developer’s overtime rate:

$62.4 x 1.5 = $93.6

The developer’s overtime rate is $93.6 per hour. For two hours of overtime work, that’s: 

$93.6 x 2 = $187.2

Regardless of whether you are an employee or an employer, you’ll need to make sure that you have obtained the most accurate numbers regarding overtime work month in and month out. This is especially important for business owners who regularly calculate payroll. 

Substep #3: Include bonuses, if any

Any bonus received during the time span you chose could also be part of the pay rate calculation. This is where things get more complicated. 

Bonuses that are not connected to an employee’s performance and not used as an incentive should be excluded from the calculation. Some of them are holiday and discretionary bonuses as well as the ones workers receive as a percentage of their total earnings. 

That’s because these rewards are: 

• Either not known in advance, 
• Not connected to an employee’s performance, or are 
• Already indirectly included in the calculation. 

On the other hand, you can include any other bonus that is designed to motivate your performance, productivity, and engagement. 

Since we’re considering a short project in both instances, a larger bonus is rare. Still, let’s assume that you or your worker achieved a certain target and was awarded a lump sum of $100. 

Step #3: Get the final rate of pay

Once you determine all of the aspects of the pay rate, getting the final amount will be pretty easy. 

To get the final rate pay, you should add up every bonus, overtime rate, and regular rate during a specific time span. 

Regular rate + overtime rate + bonuses = final pay rate

In the graphic designer situation, you’ll be adding up your weekly earnings from the regular working hours, overtime, and the one-time bonus you received. So, your calculation will be:

$1,280 + $144 + $100 = $1,524 

You can divide the final amount by the number of hours worked to get the hourly rate.

Final pay rate / the number of hours worked = final rate per hour

 $1,524 / 43 = $35.4

Your final rate equals to $35.4 per hour. 

As a business owner who hired a developer for a project, you’ll also be adding up regular hours, overtime, and bonuses in your calculation. It will go like this:

$2,496 + $187.2 + $100 = $2,783.2

Now, we can also calculate the final rate per hour for the developer.

$2,783.2 / 42 = $66.3

The developer’s final rate of pay will be $2,783.2, or $66.3 per hour.

Conclusion: Learning about pay rates leads to fair compensation and happier workers

Hopefully, you now understand what the pay rate is and the benefits of knowing the exact meaning of the term. Learning about pay rates helps workers around the world figure out where they stand compared to the standards in the industry. Moreover, this information lets them estimate earnings from future projects.

As an employer, learning about employees’ pay rates helps you stay competitive and keeps your employees satisfied with their jobs. What’s more, having enough detail about pay rates enables you to estimate potential expenses and earnings for future projects.

Having this piece of information is just one step towards making the most accurate predictions about recurring projects, scheduled assignments, and budgets. Since that kind of calculation can sometimes be too complex, you can always invest in a forecasting tool that will help you to easily and quickly visualize your project’s progress. 

✉️ Did you manage to calculate your pay rate for a specific time period or project? Did you find it useful? Feel free to share your insight with us at blogfeedback@clockify.me. Also, if you liked this article, you can always share it with your friends and colleagues!