Small employers: Lean pay, more flexibility?

Does $50,000 a year constitute decent living in the United States today? What about $40,000? Or $30,000?

Maybe that’s not the right question to ask. For some workers, lower pay might be an acceptable tradeoff for better work hours and more flexibility. And small businesses might be the best place to find those kinds of benefits.

Between July 1, 2023, and July 1, 2024, more than 1 in 4 positions at employers with fewer than 20 people—including employees and contractors—paid less than the equivalent of $30,000 a year, according to ADP payroll data. Almost half paid less than $50,000. But we found big differences by employer size.

ADP Research compiled data from nearly 140 million month-job records reflecting more than 19 million unique jobs, then examined the bottom half of gross wages. These wage levels were relatively similar across employers of all sizes, with one exception: At the smallest employers, these wages were noticeably lower.

The small-employer pay gap

So, do small employers pay their people less?

Some full-time jobs at small employers might indeed pay less than equivalent positions at larger employers. But in the big picture, the lower pay we found at small employers might reflect a greater incidence of flexible work arrangements, such as part-time employment, contract work, and project-based jobs.

For small businesses, bringing on a full-time employee can be a significant commitment. Every employee on the payroll is a major expense, one that persists even when business slows or the person underperforms. Yes, workers can be let go, but layoffs and firings are rarely straightforward and often bring their own costs and challenges.

Part-time or contract jobs can be manageable alternatives. For employers, they can carry lower costs and more limited commitment.

The worker perspective can be more complicated. Some people in contract or part-time roles might juggle multiple positions at different companies. But for others, a less-than-full-time income might be enough. And a schedule with flexibility and free time might be a net plus.

Part-time and contract jobs are likely to appeal to students, younger workers, and people at or near retirement age. And in fact, workers younger than 25 and 65 and older are significantly overrepresented at small businesses.

At the smallest employers—those with 20 or fewer people—the share of workers younger than 25 was more than 40 percent larger than at the largest employers—those with more than 50 people. The share of workers 65 and older was almost twice as large than at the biggest employers, and substantially greater than at all middle-sized employer categories.

In addition, small businesses also give workers the chance to make a direct impact on the business and to have a stronger voice in shaping decisions.

The takeaway

Flexible and part-time work arrangements might reflect the financial realities of small businesses, but these employers play a vital role in the economy. New businesses almost always start small, yet they’re an essential economic engine. They often are hubs of innovation, be it out of necessity or because their smaller size makes them more nimble.

In some cases, innovation itself is what spurs the company’s founding. Small employers are so intrinsic to economic progress that it’s hard to imagine a thriving, dynamic economy without them.

Of course, small employers don’t have a monopoly on flexible work. About 10 percent of jobs at businesses with more than 500 workers pay $30,000 a year or less. At employers with 50 to 499 workers, the share of lower-paid workers is smaller, at 6.5 percent to 7.5 percent.

This doesn’t mean medium-sized employers necessarily pay better than large ones. Rather, large businesses have a wider spread of wages, with a larger share of jobs at both the low and high ends of the pay scale.

The bigger takeaway from the data is that the part-time and contract roles so prevalent at small businesses make up a much smaller share of employment at medium and large businesses.

While small employers might sometimes offer their staff and contractors only a partial livelihood, the flexibility of these roles can benefit workers who prioritize adaptable schedules or who are navigating transitions into or out of full-time employment. This adaptability gives workers valuable options and is crucial to the overall health of the economy because it helps small businesses to adapt and survive, new ventures to take root and grow, and the business landscape to remain dynamic.

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Methodology: ADP Research compiled data from nearly 140 million month-job records reflecting more than 19 million unique jobs spanning the period from July 1, 2022, to June 30, 2024. In contrast to the Bureau of Labor Statistics’ Quarterly Census of Employment and Wages, which is based on state unemployment insurance records and therefore excludes contractors, ADP data includes all individuals paid by ADP clients, including contractors. To address uneven pay over the calendar year, annual pay amounts correspond to twelve times the average monthly pay over the prior 12 months, or over the duration to date of the current employment spell if less than 12 months. Thus, an entry from July 2023 reflects pay over the 12-month period ending July 2023. Pay amounts reflect pre-tax gross pay as reported by employers, including bonuses, commissions, and equity-based pay such as stock grants and options, as well as employee deductions for benefits. Records were adjusted for pay periodicity, such as monthly and bi-weekly payrolls. Partial months of employment were omitted. Observations were re-weighted to be more nationally representative using information on local employment by industry and employer size from the BLS Quarterly Census of Employment and Wages.