5 Wage Types and How They Affect Your Employees

Compensation professionals handle a variety of wage types each day. The differences between each may be minimal but can cause a variety of issues if not understood correctly.

The Biden administration has also placed an emphasis on increasing the federal minimum wage, making it all the more important for large, multi-jurisdiction employers to have a handle on wage types.

Check out the definitions of each wage below to better understand how they may affect employees.

1. Minimum Wage

Minimum wage is the most widely recognized term in the realm of employee compensation. It is the lowest hourly wage an employer can pay an employee for work.

While the federal government mandates a $7.25 standard minimum wage, most states have their own minimum wage rates – many that exceed the federal rate.

2. Living Wage

Living wage is the lowest wage at which the wage earner and his/her family can afford the most basic costs of living.

Because the needs of each employee differ based on marital status, number of children, location and other cost-of-living considerations, the term living wage often pushes many hot-button political issues.

Legislation and policy conversations surrounding the increase of minimum wage often intersect with those of living wage. Proponents of a higher federal minimum wage, for example, argue an increase would help the working poor achieve a living wage and reduce the number of full-time workers who rely on government assistance. Opponents, meanwhile, cite the potential for job losses with a higher federal minimum wage.

Although living wage and minimum wage are often used interchangeably, they differ. For instance, minimum wage is mandated and enforced by legislation, whereas a living wage is not.

To learn about the living wage in your area, try MIT’s Living Wage Calculator.

3. Prevailing Wage

Prevailing wage typically refers to the rate of pay contractors and vendors must offer their employees when doing business with a government agency.

For example, Los Angeles requires contractors engaged in public works contracts with the city (e.g., road construction) to pay workers a base level determined by the State of California’s Department of Industrial Relations.

A prevailing wage requirement reduces the ability of vendors to unduly propose costs for government contracts to the detriment of their workers. One of the key components to its development was the Davis-Bacon Act of 1931, a federal law that mandates all laborers, contractors and subcontractors be paid a prevailing wage for all public works projects in excess of $2,000.

4. Tipped Wage

Tipped wage is a base wage paid to an employee who receives a substantial portion of his/her compensation from tips.

At the federal level, the Fair Labor Standards Act (FLSA) states employers of tipped employees are only required to pay $2.13 per hour in direct wages if that amount combined with tips received is equal to the federal minimum wage.

If the amount combined with tips does not equal the federal minimum wage, the employer must pay all tipped employees at least the federal minimum wage.

Of course, the expansion of minimum wage laws across the U.S. has often come with the elimination of tipped wages, especially in employee friendly states like California.

Guide: County and City Minimum Wage Increases – Dec. 31, 2020 and Jan. 1, 2021

5. Fair Wage

By general definition, fair wage is a compilation of company practices that lead to sustainable wage developments.

According to the Fair Wage Network, These practices include:

• Living wage floor
• Compliance with national wage regulations, such as minimum wage, payment of wages, overtime payments, paid holidays and social insurance payments
• Ensuring proper wage adjustments as living wage and minimum wage change
• Wages that align with the skills necessary of the job being performed

This blog was originally published in October 2017. It was updated Feb. 9, 2021.