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Keeping an eye on ‘how employees spend their work hours’ has always been a common practice. When the industrial revolution began, floor managers or supervisors were aligned to take care of managing & monitoring employee hours.
Of course, the scope of manual errors was a huge challenge for employers. Once computers became a regular part of work life, technology took over the time management task. Employees used to get time cards, which got replaced by punch-in machines, and the 21st century saw the usage of biometric time management.
The biggest flaw with the biometric punch machine was that it only recorded the ins and outs. That means companies still needed managers to assign and track work, employee leaves, shift schedules, and timesheets. Well, today, we are living in the golden age of technology, and now technology has you back in every business operation.
In this blog, we are going to discuss 3 different types of employee hours: billable hours vs. non-billable hours vs. hours worked. We will explore these concepts in depth and provide examples to help you better understand the differences.
From explaining each type of hours to its pros and cons and providing real-world examples, this blog will teach you everything you need to know about these important concepts.
With that said, let’s begin!
What Are Billable Hours?
Billable hours refer to the amount of time that employees spend working on projects or tasks that can be billed to clients or customers. This can include time spent on client consultations, meetings, research, and the actual completion of projects. Billable hours are typically tracked by employees and reported to their managers, who use the information to bill clients and track their team’s productivity.
Real Life Examples Of When Billable Hours Are Used For Employees?
Billable hours are most commonly used to calculate the time an employee has worked on a billable project or task. This could be anything from consulting services, legal services, or IT/web development projects to freelancers. Let’s check it out:
- Consulting Firm: A consulting firm specializing in providing expert advice to businesses may use billable hours to track the amount of time their employees spend working on specific client projects. The firm may bill clients per hour and track employee hours using a timekeeping system. This allows the firm to accurately bill clients for the time and expertise of their employees.
- Law Firm: A law firm may use billable hours to track how much time their attorneys spend working on specific cases for clients. The firm may bill clients per hour and track attorney hours using a timekeeping system. This allows the firm to accurately bill clients for the time and expertise of their attorneys.
- Freelancers: Freelancers may also use billable hours to track the time they spend working on specific projects for clients. Freelancers may bill clients per hour and track their hours using a timekeeping system. This allows freelancers to accurately bill clients for the time and expertise they provide.
How Are Billable Hours Calculated For The Above Industries?
- In consulting firms, billable hours for employees are usually calculated by multiplying the number of hours worked by the employee’s rate. For example, if an employee works 40 hours weekly and is paid $75/hour, their total billable hour calculation would be 40 x $75/hour or $3000.
- In law firms, billable hours are typically calculated based on an attorney’s hourly rate multiplied by the total number of hours they work. For example, if an attorney charges $100 per hour and works 50 hours in a week, and spends 5 hours on a single case or client, their billable hour calculation would be 5 X $100= $500.
- In freelancers, billable hours are typically calculated based on a freelancer’s rate multiplied by the total work completed in a given week. For example, if a freelancer charges $50 per hour and completes 8 hours weekly, their billable hour calculation would be 50X8=400.
Pros And Cons Of Billable Hours
If you are considering billable hours, you should consider this business model’s pros and cons. Here are the pros and cons of billable hours
Pros Of Billable Hours
1) Clarity Of Billing
One of the major advantages of using billable hours is the clarity and transparency it provides when billing clients. Clients know exactly how much they paid against what services.
2) Higher Flexibility
Being able to bill clients on an hour-by-hour basis provides tremendous flexibility for businesses. This allows them to quickly and easily adjust their work hours to meet the needs of their clients without needing to make larger changes to their overall schedule.
3) Incentivizes Efficiency
Billable hours incentivize professionals to work efficiently and quickly, as they are paid for the time they spend working on a project. This can lead to greater productivity and better quality work, as professionals are likely to put their best effort into projects when they know they will be compensated for it.
Cons Of Billable Hours
1) Pressure To Bill More Hours
One downside to billing clients hourly is that some professionals may feel pressure to work more hours than they can work to get the desired amount paid. This can lead to fatigue and other health problems, as professionals work long hours without breaks.
2) Incomplete Or Inaccurate Records
If a professional cannot keep accurate records of their work hours, this can lead to billing complications. If a client disputes their bill, it may be difficult to prove that the professional worked the hours they claimed they did.
What Do You Mean By Non-Billable Hours For Employees?
Non-billable hours refer to the time employees spend on activities that are not directly related to generating revenue for the company.
This can include training, meetings, administrative tasks, and other tasks necessary for the operation of the business but does not directly contribute to billing clients or generating income.
These hours are usually not charged to clients and are considered part of the employee’s working time.
Real-Life Examples Of When Non-Billable Hours Are Used For Employees?
Example 1- Employee meetings and team-building activities: Non-billable hours may also be used for regular meetings and team-building activities. These may include weekly team meetings, departmental meetings, or company-wide meetings. These hours are not billable to clients but are important to building a strong and cohesive team.
Example 2- Employee training: Non-billable hours may also be used to train new employees by senior employees or other experienced professionals. These training programs are considered part of employee development and are not billable to clients as these operations are part of the company’s internal culture.
Example 3- Business development: Another common use of non-billable hours is for business development. This can include networking, attending industry events, and researching potential clients. These activities are important for the business’s long-term growth, but they do not directly generate revenue. Therefore, they are considered non-billable hours.
How Are Non-Billable Hours Calculated For The Above Industries?
There is no set formula for calculating the non-billable hours of an employee in any given industry.
However, most companies use a combination of factors to calculate the number of non-billable hours employees work each month.
These factors may include the type of work performed, the amount of discretion granted to the employee, and the company’s policy on such tasks and operations for employees.
Pros & Cons of Non-Billable Hours
The pros and cons of non-billable hours can help you decide on number of non-billable hours for your employees. Here are some pros and cons.
Pros Of Non-Billable Hours
1) Employee Development
Non-billable hours can be used to develop the skills and knowledge of employees. These activities include job training, attending conferences, or participating in team-building exercises that enhance employees’ professional development.
2) Reduced Stress Levels
Some employees find it less stressful when they do not have to track their hours or keep up with a busy work schedule. Non-billable hours can free up time to take care of personal matters, lowering stress levels.
3) Business Growth
Non-billable hours can be used for business development activities, such as networking and research, which can lead to long-term growth and success for the company and its employees.
Cons Of Non-Billable Hours
1) Productivity Drops
When employees’ are working non-billable hours, they lack the motivation to deliver. That’s why you need to track productivity and time spent on non-billable hours as well. Because even though the employer is not billing the client, but still the employer is paying the employees; therefore, non-billable hours should contribute to long-term growth of the company.
2) Inability To Evaluate Employee Performance
When employees are not bringing in bucks for their time working, it can be difficult to accurately measure their performance. In some cases, employees might feel like they are not given the same level of appreciation as those who are paid by the hour, leading to a loss of morale.
What do you mean by Hours Worked?
Hours worked refers to the time employees spend performing their job duties, including any overtime or additional hours beyond their regular schedule. This can include time spent on training, meetings, and other work-related activities, as well as breaks and lunch. It is typically used for calculating pay, benefits, and overtime pay.
Real-Life Examples Of When Hours Worked Are Used For Employees?
- Overtime pay: Hours worked are used to calculate the amount of overtime pay an employee is entitled to. If an employee works more than 40 hours a week, they are typically entitled to time-and-a-half pay for those additional hours and extra pay for every eight hours worked beyond the 40-hour threshold.
- Benefits Eligibility: Some companies have benefits, such as health insurance, retirement plans, and paid time off, that are based on the number of hours worked by an employee. Eligibility for these benefits is determined by the number of hours worked by an employee, so hours are often used when determining an employee’s eligibility for these benefits.
- Attendance Tracking: Employers may use the number of hours employees work to track attendance and punctuality. This can be used to monitor employee productivity, identify patterns of absenteeism, and ensure that employees are working the hours for which they are being paid.
How Are Working Hours Calculated For The Above Cases?
- Overtime Pay: Overtime hours worked are multiplied by 1.5 to determine the amount of overtime paid an employee is entitled to. An extra hour of pay is given for every 8 hours worked beyond 40 hours.
- Benefits Eligibility: The number of hours worked is used to determine an employee’s eligibility for certain benefits, such as health insurance, retirement plans, and paid time off. This is usually determined by taking the total number of hours worked in the week and dividing it by the number of hours in a typical work week.
- Attendance tracking: Employers may track how many hours employees have worked to see if they are working their regular hours. The total number of hours worked in a week is divided by the number of days in that week to get the average number of hours worked per day.
Pros & Cons of Hours Worked
There are pros and cons to hours worked concept. Some people work best under pressure, while others prefer more relaxed schedules. Here are some of the benefits and challenges to hours worked method of managing time and deciding payroll:
Pros Of Hours Worked
1) Accurate Record-Keeping
By tracking the number of hours worked, employers can ensure that they pay employees for the exact amount of time they have worked.
2) Better Time Management
By tracking the number of hours worked, individuals and teams can better manage their time and ensure that they are using it effectively.
3) Accurate Billing
Tracking the number of hours worked can help ensure that clients are billed accurately for the time spent on their projects and can avoid misunderstandings or overcharges.
Cons Of Hours Worked
1) Burnout Among Employees
When employees are constantly monitored and evaluated for their work hours, it can lead to burnout. This can decrease productivity and morale in the workplace.
2) Increased Turnover Rates
When hours are tightly regimented, employees may feel pressured to continuously work long hours to maintain their positions. This can lead to higher turnover rates among employees.
Tips And Tools For Effectively Tracking And Managing Each System:
Managing Billable, Non-Billable, And Hourly Worked System
Whether you have a billable, non-billable, or hourly working system, it is important to track these systems effectively to properly manage your time and resources. Here are some tips & tools for doing so:
- Use Time Tracking Software- Having software that can track and manage your time effectively is a great way to stay organized and efficient. Many different time-tracking software options, such as Workstatus, Desktime, and Hubstaff, can help you track and manage your time more effectively.
- Set Up A Billing System- Having a system that tracks and bills your time is also important. This can help you to track and manage your time more effectively and keep track of billing information, such as hours worked, rates billed, and client payments, etc., for easier client billing and invoicing.
- Create A Time Management Plan- A plan outlining what tasks need to be done and when, will help you stay on track and better manage your time. This can include setting deadlines for completing specific tasks, breaking down large tasks into smaller ones, creating a schedule of how much work should be completed each day, etc.
With a helpful tool such as time tracking software, a well-established billing system, and a time management plan, it should be easy to manage every type of working system effectively and efficiently.
There are a lot of talks these days about what people should and should not be billing for their time. Hours worked, billable hours, and non-billable hours can all be confusing.
In this blog, we have discussed the three main types of hours worked and how they differ. We hope this blog has helped to demystify the topic of employees’ working hours and given you some clear guidance on how to structure your billing in a way that works best for you.
If you have any questions or suggestions, feel free to leave them in the comments below. We will be happy to help out!
That’s all for today
Thanks for reading !!