How to decide what to pay your first employee: the legal requirements, how to find market rate, what a hire costs beyond pay, and what your business can afford.

Minimum Wages & Regulations

Minimum Wage

The federal minimum wage is $7.25 an hour. For tipped work the minimum cash wage is $2.13 an hour, so long as tips bring the worker up to $7.25; if they don't, the employer covers the shortfall. Many states set higher minimums. The Department of Labor (DOL) has a map of the minimum wage in every state. Counties and cities can raise it further; UC Berkeley maintains a list of minimum wages in every city.

Overtime Pay and Rules

As defined in the FLSA, hours worked after 40 in a workweek are classified overtime, and these hours must be paid at time and a half, 1.5× the normal rate. Some states have additional laws regarding overtime, notably California. Review the guidance of your state's department of labor.

A workweek is the employee's consecutive and recurring 168 (7×24) hour period of work.

Is Your Employee Exempt or Non-Exempt?

The Fair Labor Standards Act (FLSA) makes specific employees exempt from guaranteed overtime and minimum wage. Employees are non-exempt by default and, unless they meet certain criteria, are entitled to overtime and a minimum wage. Non-exempt workers can be paid hourly or salary: contrary to the common misconception that being salaried alone makes an employee exempt.

A "white-collar worker" is exempt from FLSA only if their job passes all three of these tests:

1. Earns at least $684 a week ($35,568 a year).
2. Is paid a fixed salary: unchanged by the quantity or quality of work done. Except for outside sales which has no salary requirement, or computer employees which pass the test above $27.63/hr.

3. Performs day-to-day duties fitting one of these roles, not just job title.

   • Executive. Directs 2+ full-time staff; has a role in hiring / firing decisions.
   • Administrative. Office/non-manual work tied to business operations.
   • Professional. Applies advanced knowledge from study or performs creative/artistic work.
   • Computer Employee. Systems analyst, programmers, software engineers.
   • Outside Salesperson. Primary duty is sales, away from the employer's place of business

Some states have stricter exemption tests — California, New York, and Washington are some — so check your state's rules.

Paid Leave

Federal law does not require paid vacation days, sick days, or holidays, though many states require some amount of paid sick days.

Pay Frequency

It is most common to pay hourly employees once every other week. But most states have specific pay frequency laws, so review this DOL table to find out which payment schemes are available in your state.

Pay Transparency

Some states have pay-transparency laws that require posting a salary range, and others ban asking about salary history.

Exceptions

Many industries have their own rules that change these obligations: agriculture, restaurants, auto sales, home care, and trucking to name a few. Check the DOL's fact sheets and with your state labor department, or ask an employment attorney.

Finding Competitive Salaries

Understanding what your employee expects to be paid is crucial. To get an accurate picture of the market rate, you will need to do some research. The Bureau of Labor Statistics publishes figures on the average salary of each profession in the U.S., nationally and by state. If this information isn't enough, online services such as Payscale and Glassdoor offer reports on salary ranges by position. These figures should inform the ballpark pay you offer, but considerations such as qualifications and aptitude should adjust the value up or down.

What You Will Pay

An employee will cost more than their wage. On top of gross pay you'll carry several more costs, such as:

• Employer Payroll Taxes. 7.65% of wages for FICA (Social Security and Medicare), plus state and federal unemployment tax.
• Workers' Comp Insurance. Required in most states, the amount varies with job risk.
• Benefits. Health insurance, retirement plans, paid time off.
• Onboarding and overhead. Equipment, software seats, onboarding/training, space.

The fully-loaded cost will typically land in the range of 1.25-1.4× base wage — so a $50k salary really costs around $66k. Budget around the loaded cost, not the wage, when hiring.

What You Can Pay

The percentage of your gross revenue spent on payroll can vary widely by industry, where anything from 15–80% may be appropriate.

Estimate the revenue the new hire will bring in; their fully-loaded cost must come in below that for the role to pay off. Confirm that the hire is affordable during slow months, and during the training period before they become productive. If not, consider a contractor, part-time worker, or waiting to hire.

Type of Pay

Hourly vs salary: hourly is pay for time worked, which is convenient for part-time and shift work; you must track time. Salary is fixed, simpler, and predictable (but remember, choosing salary alone doesn't necessarily make the employee exempt from overtime after 40 hours). Your decision rests on how variable the hours are, if the employee is exempt or not, and your administrative overhead.

Base plus variable: guaranteed base pay plus something else; be it commission, profit sharing, bonuses, or tips. Variable becomes an option when output is measurable; it aligns pay with performance and lowers your fixed cost. The tradeoff is that it shifts risk to the employee — motivating in the right amount, but too much uncertainty will make the role volatile, and so positions that need stability should be calmed with a higher base rate.

Negotiate

Before interviewing, calculate the value or return on investment that you expect from the new hire. You should understand the monetary value they will bring to your business, as this will inform what it is practical to pay them.

Don't be tempted to offer a lowball salary just because they will accept it. They may be satisfied in the moment, but underpaying them will likely cause them to jump ship soon, and you'll have to find someone new — which can cost more in rehiring and retraining. Conversely, don't offer an unsustainably high rate in the rush to fill a vacancy if it will be unaffordable later. It is much easier to give a raise later on than a pay cut.

Be prepared to be flexible. Start by explaining your offer, including the benefits and opportunities for growth, and how they align with your candidate's needs and aspirations. Next, listen to their priorities and try to adjust your compensation package to their needs. High wages are excellent if you can afford them, but if they aren't, leverage perks instead: flexible hours, extra paid leave, a clear path to promotion, equity, or insurance. This can make the negotiation a mutually beneficial agreement instead of a zero-sum game.

Raises, Bonuses & Market Trends

Consider offering performance-based bonuses for tasks such as making a sale or completing a project. Be clear in their reason; they should have objective criteria in order to inspire motivation and avoid feelings of favoritism. Sign-on bonuses can be useful for attracting exceptionally qualified candidates. A retention bonus might be offered if work conditions become unexpectedly difficult. Holiday or profit-sharing bonuses are a rewarding way to share company success, reinforcing a sense of appreciation and mutual growth.

Market rates change, so it's important to adjust annually for inflation and review the current going rates to ensure your compensation remains competitive. Inflation is usually around 3% every year, so as an example, a $50,000 salary one year will only have the purchasing power of $48,500 the following year. However, since inflation can fluctuate, sometimes even trending negative, you should check the recent rates before making adjustments.