5 Wage Types and How They Affect Your Employees

Minimum, prevailing, tipped, living and fair wages all address different aspects of employee compensation that aim to balance fair pay with economic and practical considerations for both workers and employers.  

Miscalculating wages can result in legal and financial penalties, damage to reputation, decreased employee morale and productivity, and higher turnover rates.. Ensuring accurate and fair wage calculations is crucial for maintaining payroll compliance, employee satisfaction, and overall business success.

In this article, we will define each wage type, including the risks of miscalculating each wage, and how GovDocs Minimum Wage solution can help.

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. This wage can be set at the federal, state, or local level.  

Although minimum wage is the most recognized, it is also one with the highest risk of legal penalties, fines, and lawsuits. Repeated violations can even result in criminal charges.  

Coupled with minimum wage variations at city, county, state, and federal levels, organizations must also be aware of industry-specific minimum wage dynamics such as hotel, agriculture, healthcare, restaurant, and more. These complexities begin to create a landscape nearly impossible to navigate without external resources to ensure organizations aren’t underpaying any employees.  

💡Did you know: GovDocs Minimum Wage solution also ensures that your employee meets the exempt salary threshold level in states that are higher than the federal level? Learn what else GovDocs Minimum Wage can help streamline for your business >>

2. Tipped Employee Wage

Tipped employee wage is a lower base wage paid to employees who regularly receive more than a specified amount a month in tips, with the expectation that tips will make up the difference to at least the applicable minimum wage.  

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. 

When dealing with tipped employees across multiple industries and jurisdictions, this type of wage can become a challenge for organizations. It is important to pay attention to:

• Different base wages
• Tip credit variations
• Service charges
• Overtime calculations
• Tip pooling regulations
• Payroll system

Organizations can ensure they stay ahead of tipped wage obstacles by completing regular audits and compliance checks, utilizing a centralized payroll system, providing basic employee education, and partnering with an employment law compliance vendor who supports their efforts.  

💡Did you know: Auditing your tipped wage payroll is easy with GovDocs Minimum Wage solution where you can easily export a filterable, CSV of all your locations to compare payroll with wage rates.

3. Living Wage

Calculated differently than minimum wage, a living wage is often determined and set by researchers and advocacy groups. The wage is deemed high enough to maintain a normal standard of living so employees can afford necessities like housing, food, and healthcare. Although, this is not a regulated wage, it can easily cause negative impact to organizations while it increases financial stress on employees, higher turnover rates, and difficulties attracting talent.  

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 can often push 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 by legislation, whereas a living wage is not.

4. 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.

5. Fair Wage

Fair wage is a concept that encompasses several factors related to compensation. It aims to ensure that workers are paid justly for their labor by measuring several elements. Here are some of the key elements that typically define a fair wage:  

• Living wage
• Market rate
• Skill and experience
• Working conditions
• Employers’ financial health
• Collective bargaining

💡Did you know? As you navigate the complexities of employment law regulations and economic landscapes, it’s crucial to highlight the significance of industry-specific minimum wage tracking while planning for fair wage rates. Enter GovDocs Minimum Wage. Stay up to date with industry-specific minimum wage rates (such as hotel, hospitality, retail and restaurant) that you can find easily in one place. 

Conclusion 

Understanding the complexities of fair wage, prevailing wage, minimum wage, tipped employee wage, and living wage involves appreciating the often-nuanced differences between these concepts and recognizing their impact on employees. Understanding these complexities is crucial for developing policies and practices that promote fair and just compensation for all workers.