Hourly Rate Contracts 101: The Complete Guide

What is an Hourly Rate Contract?

Most salary contracts are paid fixed salaries, but hourly rate contracts are similar. They both offer the same general level of job security and benefits. However, with an hourly contract, instead of being paid monthly, a person is paid for every hour they have worked. Hourly rate contracts are often used in temporary positions and by freelancers.
Contractors are more likely to offer employees an hourly rate. Employers who pay employees in an hourly basis must track how many hours each employee will work before issuing the payment. This is done for payroll purposes to calculate how much to pay employers. It is usually a good idea to have employees check or punch in and out for shifts to keep track of this information .
Just like a salary contract, an hourly rate contract can be written to include overtime payments for employees who have worked more than their standard hours. The contract will not usually show a salary figure, but will instead show the hourly rate multiplied by the hours to be worked. An hourly rate contract will often use the same contract terms as a contract for salary.
If a business has business consultants, they may be offered an hourly rate contract. Individuals who work in a field that fluctuates substantially with the economy may find that they are offered an hourly rate contract for temporary jobs.
It is possible for a person to ask for an hourly rate contract to save money if they do not need full time work. An employee can be offered this type of contract instead.

The Benefits of Hourly Rate Contracts

Hourly rate contracts are the polar opposite of fixed fees. Employers are billed for the number of hours worked and the hourly rate set out in the contract. Hourly rates are generally more expensive, which is a big deterrent for some employers. But hourly rates have advantages such as flexibility and fairness.
An advantage to hourly rate contracts is that they aren’t tied to specific tasks or time periods or defined duties. This gives an employer the flexibility to adjust the scope and/or timing of work needed and have those adjustments compensated. For example, if a task took longer than expected, an hourly rate employee would continue to be paid for the extra hours worked.
Another advantage is fairness. An employer is only charged for what is required. Rather than paying a fixed fee even if a task isn’t completed within a time period, an hourly rate employee is paid what they accomplished. Similarly, if work is completed quicker than anticipated, an employer pays less.
There can also be advantages to the employer/delegator in retaining a person on an hourly rate. The employer and employee have a clear understanding of time/duration. There’s no ambiguity regarding scope of work to be done. There’s no concern that basic duties will foster an implied contract of employment. There’s the advantage of by-passing laws requiring the abrogation of privileges such as seniority – such abrogation allows the employer to adjust the scope and/or duration of work as needed.
The flexible hours and the fairness of payment are appealing aspects of an hourly rate contract. The same applies to the employer/delegator as well.

The Drawbacks of Hourly Rate Contracts

Hourly rate contracts can be an easier agreement to come to terms with when first starting out, but it is important to note that there are potential downsides to hourly rate contracts that may affect your business. The biggest challenge to hourly rate contracts is the unpredictability of income. Based on the number of hours worked, the amount paid to you can fluctuate from month to month and based on seasonality of the business or other circumstances.
Another challenge of hourly rate contracts is time management. If you are being paid by the hour and there is a lot of demand for your work, your work life can quickly spiral out of control and turn into a time-consuming job. In contrast, many salary contracts allow the worker to value their time more highly and take on the most valuable work to them, be it paying the highest hourly rate or requiring the most expertise and effort. Hourly contractors can feel obligated to work longer then they should so that the client feels their money is well-spent.
It is also a potential drawback for companies and contractors. Some companies prefer to do fixed salary contracts so they can control costs more effectively. A contractor attempting to build a long-term relationship with a client may need to consider if longer-term, fixed contracts are more mutually beneficial to long-term success.

Key Terms in an Hourly Rate Contract

For an hourly rate contract to be comprehensive, it should include all the following components:

• Payment terms. If you are not being paid in advance or on delivery of your work, then you should specify when you are to be paid. It can be on a monthly basis after invoices are submitted, weekly, or even daily. Make it clear what happens in the event of late payment, i.e., whether interest is charged and at what rate.
• Hours of work. Clearly specify the hours you are expected to work for the work being done under the contract. If the work is part-time, mention the number of hours and whether they will be set on a fixed schedule or whether you will be working flexible hours. State that for work outside the specified hours, the client will pay at an additional agreed-upon hourly rate.
• Position and duties. Do not make this clause too general. It should be relevant to the contract and clear enough to avoid unnecessary future disputes. It should list your job title and specific job description for both parties to refer to throughout the duration of the contract.
• Termination. Include a clause which states that you may terminate the contract if the client is in breach of the contract. This clause should describe which circumstances would allow you to terminate the contract, and how termination will be done.

Tips for Negotiating an Hourly Rate

Negotiating an hourly rate can set the foundation for your earnings on a contract. In most cases you’ll receive a quote from the person or company interested in your skills and services. When you put yourself out there – you may be undercut by a competitor, or, offer your true value and experience upfront.
The most important consideration when negotiating an hourly rate is the asking price. Hiring managers want to know what you feel is an acceptable rate to perform the job description. Likewise, they want to feel confident that your skill set matches what they are looking for. How do you determine the rate that works best for you and your experience?
The Internet is a valuable resource. Most of your competitors are marketing their services online. Consider consulting job boards related to your niche. You’ll not only be able to view the competitors’ rates, but also their services and other information. Find out what they’re offering that’s similar to your services, and what makes their offerings different .
Another area to research is a freelance marketplace. A freelance marketplace is a collection of freelance professionals in one place. There are many freelance marketplaces on the web. It’s fairly easy to sign up as a freelancer. Then you can start marketing yourself and your skills while checking out the competition. You’ll have the opportunity to view how many freelancers are available in your niche. You’ll also be able to see their rates and what services they are offering.
If you have a LinkedIn or Facebook page, you can look within your network to ask people what they would be willing to pay for your services. Your network members can provide you with information on what people in the same situation as them are paying other freelancers for similar services.
Finally, you can leverage a simple but effective negotiation tactic. Low-balling your initial asking price will allow you to negotiate up to a more reasonable rate. Lowering a price that seems overpriced is a lot easier than increasing the rate after the client is locked in.

Common Pitfalls to Watch Out For

Both employers and employees can make mistakes when contracting on an hourly rate basis.
Don’t Your Use Your Own Hours to Estimate When You Can Find Money for Someone
First, employers must ensure they are budgeting for wages. With government funding cuts or the like it can be tempting to try and hold on to your employees’ time in order to reduce costs. Employers may say "but we are paying you on an hourly rate, can’t you work less?" or "we will cut your hours down to allow us to fund you". The problem is employers should not be and are not allowed to use their employee’s time as a buffer. If the employee has worked more time than was expected when they started their shift they are entitled to payment for that time, regardless of the employer’s budget restrictions.
Not Planning for Employee Absences
Secondly, employers should plan for absences. If you have been one person short for several days or weeks in a row you should have planned for their replacement. It is not acceptable to expect your employee to pick up the slack in this fashion. As a result many employees will become resentful of the employer for taking advantage of them in this way. Employees should never be overworked, if there are problems with staffing they should be dealt with. Again employers cannot be expecting their employees to jump through hoops to cover an absence when they have not budgeted or planned for it. It is also going to cause significant problems with morale if you expect your employees to take on extra tasks without accounting for the associated pay.
Diffusion of Liability
While in Quebec the possibility of diffusing liability (i.e. lying the collectivity of employees at the workplace/similar workplace of all affected employees) exists, employers should be very wary before they take on this approach. Employees who are contracted on an hourly rate basis will be exempt from the diffused liability provision of the Civil Code of Quebec. This means the liability rests entirely with their employer. It is therefore not a defence for an employer to argue that the work was done by all the people at a location/that the work could be done by everyone at the same location. In fact, the hours worked by everyone combined may be enough to be enough to allow for liability to be present.
Establish and Enforce Breaks and Lunches
Hourly rate contracts make allowances for breaks and lunches. It is essential that you ensure that these stand even if your employee doesn’t feel like taking a break and instead decides they will work through. Be clear about the breaks and lunch that will be taken and establish when they will be taken at the beginning of each day. When they are not taken explain to your employee that they are expected to adhere to the allotment of breaks and lunches and are not permitted to work through. Otherwise what will occur is the employee will be held on the clock and paid for the break/lunch. After which they may be exhausted and unable to continue work.
Evidencing Completion of Hours
Finally employees should ensure that it is as easy as possible to prove that they have worked the hours they have been contracted for. This means getting your employer to sign off on the times they have worked, having a tracking system in place created by the employer, having daily timesheets signed and prepared by the employer or other similar methods that are accessible and easy to find and rely on.

Legal Considerations When Working with Hourly Rate Contracts

A number of legal issues arise from hourly rate employment contracts. Discrimination, tax, contract, and at times IRS regulations all come into play. There are also state and federal wage and hour laws to consider. It is critical to carefully review the legal implications of an hourly rate contract before signing or offering employment terms to avoid potential litigation.
Discrimination
The use of hourly rate employment contracts can result in discrimination lawsuits. Hourly paid employees who perform the same work as salaried employees may feel a difference in treatment between salaried and hourly employees, and may claim that they are being discriminated against. Employee class action lawsuits based upon differences between hourly and salaried employment are not uncommon in companies that have both forms of employment.
Taxes And Expenses
In lieu of having to withhold Social Security taxes from an employee’s paycheck, employers have substantial interest in classifying employees as independent contractors. Two factors in determining independent contractor status are whether the worker has a contract with the company, and the level of control the company holds over the worker. Companies using independent contractor employment contracts are required to issue IRS Form 1099-MISC at year-end to report wages paid, expense reimbursements, fees, and similar compensation. On the other hand, employees receiving hourly wages receive IRS Form W-2 at year-end to report earned income. Employers are obligated to withhold IRS payroll taxes from the employee’s paycheck, and match the amounts withheld as part of the company’s required contribution to the social security plan.
Contract Issues
As independent contractors , employees are not covered by anti-discrimination and minimum wage/maximum hour laws. However, employment contracts should be reviewed for compliance with state laws. For example, a number of states restrict or otherwise regulate whom can be considered an independent contractor.
State And Federal Employment Laws
Many states have minimum wage laws that require employers to pay employees at a minimum a specified hourly rate under state law. These minimum rates range from $4.25 to $8.00 an hour under existing state laws. A company is required to comply with the laws of the state where the work is performed if the state minimum wage exceeds the federal minimum wage.
Minimum Wage
The federal Fair Labor Standards Act (FLSA) applies to any business that engages in interstate commerce. This includes most businesses that ship goods and services to customers outside the state where the business is located. Under the FLSA, employers must pay all employees at least the minimum wage established by federal law. Although some states do not have a minimum wage law, the FLSA requires employers to pay a minimum federal wage of $3.35 per hour to "tipped" employees. The employer is allowed to take a "tip credit" of the difference between the tip rate and federal minimum wage.
Wage And Hour Law Compliance
An employee working overtime generally must be paid the same rate for each hour worked. For example, an employee making $10 an hour needs to be paid $10 for each of the regular 40 hours of work and $15 for each hour of overtime. Although many states have different overtime requirements and rates of pay, the FLSA prohibits employers to compensate employees at rates below the federal minimum rate.