When employees wear multiple hats, payroll gets complicated fast. Here’s what small business owners need to know, including the overtime rules most people miss.
Can you pay an employee two different hourly rates?
Yes, paying one employee two or more hourly rates is completely legal. It’s common when employees take on different roles, work hazardous conditions, cover undesirable shifts, or hold a second job at your business. The tricky part isn’t paying the rates. It’s staying compliant with overtime rules, minimum wage requirements, and proper documentation.
When would an employee earn two different rates?
Multiple pay rates aren’t unusual. They show up in a variety of everyday workplace situations. Here are the four most common:
- Different duties/responsibilities: An employee rotates between roles (e.g., host, server, and dishwasher), and each has its own wage.
- Hazard pay: Hours spent in hazardous conditions (e.g., a construction zone) earn a higher rate than time spent in a non-hazardous environment.
- Shift differential: Nights, weekends, or holiday shifts typically come with a premium rate over daytime (“first shift”) hours.
- Second job at your business: A full-time employee who picks up a second job in a different role working nights or weekends will likely earn a different rate for each.
Take a look at why these scenarios might require an employee to receive different hourly rates.
Different duties/responsibilities
Do you have a job rotation program in the workplace? Or, does an employee work in different roles within your business during a regular work week? If so, you might pay them two or more pay rates, depending on the work they do.
| Example |
|---|
| A restaurant employee works as a host, waiter, and dishwasher. You pay the employee the tipped minimum wage during their hours as a waiter, a separate wage when they work as host, and a third wage when they wash dishes. |
Hazard pay
Does your employee work some hours under hazardous conditions? If so, you may decide you want to offer them hazard pay for those hours. Hazard pay is additional compensation you offer employees. It can be a percentage of wages (e.g., 10%) or a flat rate (e.g., extra $2.00 per hour).
An employee who spends some hours in hazardous conditions and some hours in non-hazardous working conditions receives two different rates: one with hazard pay and one without.
| Example |
|---|
| An employee works in a construction zone two days per week and in the office three days per week. You offer them hazard pay for the hours worked in the construction zone and non-hazard pay for the hours worked in the office. |
Keep in mind that some employers decide to offer a set hazard pay per month (e.g., $200) regardless of which hours the employee works in hazardous conditions. In this situation, the employee receives the same hourly rate, plus a lump sum hazard pay “bonus.”
Shift differential
A shift differential is extra pay for employees who work less desirable shifts (e.g., night or weekend shifts). Like hazard pay, shift differentials can also be a percentage of wages or a flat rate.
You might pay employees a shift differential for certain hours worked and a non-shift differential rate for other hours worked.
| Example |
|---|
| An employee works the night shift three days per week and the day shift two days per week. Your shift differential rate is an extra $3.00 per hour. The employee’s hourly wage for the day shift is $3.00 less than their hourly pay for night shift hours worked. |
Second job
If an employee decides to apply for a second job at your business, you’ll probably pay them a different wage than the wage you pay them for their current position.
| Example |
|---|
| An employee works for you full time as a salesperson. They apply for an additional part-time job (e.g., evenings or weekends) as a receptionist. You pay a different hourly rate for salespeople than you do receptionists. So, voila! The employee has separate rates. |
5 Questions to ask about employee pay for multiple jobs
Multiple pay rates are legal, but they create real compliance obligations. Before you decide to pay an employee two or more rates, think about the potential complications. Michael Alexis, CEO of TeamBuilding, says:
One consideration you need to keep in mind of multiple pay rates is that it can create complexities in other compensation factors. For example, how you calculate overtime pay (which will vary from state to state), and what rate your employees are paid for PTO, sick time, parental leave and other benefits and perks. Each of these considerations includes legal compliance as well as policy administration. So, you need to put in the work!”
Ask yourself the following questions to stay compliant and organized.
1. Are both rates above the minimum wage?
Every rate you pay (regardless of what role or condition it’s tied to) must meet or exceed the applicable minimum wage. Federal minimums are the floor, but your state or locality may be higher.
| Rate Type | Federal Minimum |
|---|---|
| Federal minimum wage | $7.25/hour |
| Federal tipped minimum wage | $2.13/hour |
Check to see if your state or locality has a higher minimum wage and tipped minimum wage than the federal rate. You must pay the federal, state, or local minimum wage that is the most generous. The same goes for the tipped minimum wage.
2. Does it make the employee exempt or nonexempt?
Knowing whether an employee is exempt vs. nonexempt is key to correct worker classification. A nonexempt employee is protected under the Fair Labor Standards Act (FLSA), meaning they must receive overtime and minimum wage.
An employee is nonexempt unless they meet all three of the following requirements:
- Receives a salary
- Earns at least $35,568 annually or $684 per week
- Has job duties that are considered exempt (e.g., executive, administrative, or professional)
If an employee receives two different hourly rates, you have your answer: They’re nonexempt. An exempt employee must receive a salary as one of the three requirements.
But, it’s possible for a salaried employee to take on a second job at one business. Here’s the situation you may face:
- Job 1: Salaried
- Job 2: Hourly
What then? Is the employee exempt in one and nonexempt in the other? Under the FLSA, an employee who works for one business can only be one or the other (i.e., exempt or nonexempt).
In this scenario, determine whether the employee’s “primary duty” is exempt or nonexempt. If the primary duty is exempt, the employee is exempt in both jobs. If the primary duty is nonexempt, the employee is nonexempt for both jobs, making them eligible for overtime pay.
3. How do you calculate overtime?
If a nonexempt employee earning two different rates works overtime, you need to provide overtime pay. But, which rate do you calculate overtime based on?
When paying an employee two or more different hourly rates, you need to calculate the employee’s weighted overtime.
Under the weighted overtime calculation, find the employee’s hourly weighted average. You can then use their hourly weighted average to determine their hourly overtime rate and wages.
Do you have to use the weighted overtime method? In many cases, you need to. But if you and the employee establish an agreement before they work overtime, you may be able to pay overtime based on the regular rate of the position in which the employee worked overtime.
4. Do you have a clear, written policy?
If you want to pay an employee two different hourly rates, you need to evaluate the reasons for the pay difference. You want everything to be fair, after all.
According to Nathan Murphy, Co-founder and Owner of QuizBreaker:
Before paying an employee two or more hourly rates, consider the legal implications of a move like this. Make sure your different hourly rates fall into line with whatever the pay standard is. Considering your employees will likely have different responsibilities for each hourly rate, every type of work has to be evaluated to make sure you’re treating your workers fairly and paying them high enough with each rate.”
Put your evaluation method into writing through a policy. Create a policy that covers the specifics, such as:
- Whether employees are eligible for different pay rates
- How shift differentials work
- How hazard pay works
- Whether employees can take on a second job at your business
- How overtime works for employees with more than one hourly rate
In addition to a policy that goes over general information, you should also give employees detailed documents showing their different pay rates. That way, the employee knows what rate they receive for performing their work.
5. How do you run payroll for employees with multiple rates?
Manually keeping track of hours an employee works can be especially difficult when they receive two or more different rates. Keep detailed records that show how many hours the employee works in each job, their pay rate, and any overtime hours they work.
Use payroll software if you want to avoid manual calculations. Simply enter the hours the employee works for each rate, check your numbers, and run payroll.
Patriot’s payroll makes it easy to manage an employee with multiple pay rates. You can add up to 25 pay rates (roles) for each hourly employee. And, you can say goodbye to calculating that pesky weighted overtime on your own. Our software has you covered. Try it for free today!
This article has been updated from its original publication date of May 26, 2021.
This is not intended as legal advice; for more information, please click here.
