Salary vs. Hourly: What’s Better for Your Business?
Salaried and hourly employees differ in how they are paid and whether they are eligible for overtime. Which model is right for your business?
- Employees who are paid a salary and those who are paid an hourly have different payment schedules and overtime policies.
- Paid employees receive a fixed amount each pay period that is unrelated to the number of hours they put in each week.
- Hourly workers are compensated at a per-hour rate; thus, their salary is directly related to how many hours they put in.
- This article is intended for company owners who are attempting to decide whether to hire hourly or salaried workers.
There are several choices you must make when employing an employee. The decision of whether to give them a paid or hourly employment is one of the most crucial.
Based on their overall income, salaried employees typically get the same amount each pay week. On the other hand, an hourly employee receives a defined wage for each hour that they work. For instance, if they work eight hours a day at $20 an hour, they would make $160 that day (before taxes).
Both choices have advantages and disadvantages. You can make this choice more easily if you are aware of the distinctions between them and the regulations that control them.
Also Read: How to Rescind a Job Offer
What is a salaried employee?
A salaried employee receives a fixed payment based on the yearly compensation they and their employer agreed upon. The remuneration of the employee is determined by a 40-hour workweek. However, whether employees put in more or fewer hours over a given week, their pay will remain the same. Salary employees are thus not entitled to overtime compensation. You can pay them on a weekly, bimonthly, semimonthly, or monthly basis.
Pros of salaried employees
Since salaried employees are paid a set rate, you do not need to pay them overtime if they put in more than 40 hours each week. This allows for scheduling flexibility, which may appeal to workers and be advantageous to firms during times of high demand.
Employing salaried personnel will help simplify the processing of your payroll because there is less pay variation. Payroll process automation is made simpler and requires less manpower in the accounting department when processes are streamlined.
Cons of salaried employees
There is a possibility that salaried employees will work fewer than 40 hours every week because of their fixed salary. Additionally, because they aren’t checking in and out every day, they have less accountability if they arrive late or depart early. However, salaried personnel are frequently in high-level positions who are aware of their responsibilities and wouldn’t misuse the freedom that comes with their pay.
Instead of focusing only on the ‘official’ number of hours high-level employees put in at your organization, you should also take into account the volume and caliber of work they produce. Salaried workers are frequently individuals who have shown their value to the firm and are those you wish to maintain on a long-term basis.
What jobs are salaried?
There are paid roles in almost every sector of the economy, and the majority of managerial or supervisory posts are salaried. According to Salary.com, the following frequent salaried positions and their national median salaries:
- Teacher ($63,645)
- Professor ($161,343)
- Librarian ($68,416)
- Civil engineer ($71,489)
- Accountant ($58,431)
- Restaurant manager ($57,189)
- Pharmaceutical researcher ($127,903)
- Financial analyst ($61,772)
- Lawyer ($99,490)
- Doctor ($156,001)
What is an hourly employee?
An hourly worker receives a set wage for each worked hour. Hourly workers normally need to be paid time and a half for each time they work more than 40 hours in a week, depending on the state in which you conduct business. Hourly workers can be paid at the same intervals as salaried employees, but the amount of their paychecks will vary according on the precise number of hours they put in.
Pros of hourly employees
The fact that you are not compelled to hire hourly workers full-time can help you save money on benefits like health insurance, paid time off, and retirement plans.
To guarantee you have the flexibility you need to cover your activities, you may also have a steady of hourly workers. This is crucial for companies that go through busy times or who want to make sure they have backup plans in case their normal personnel aren’t accessible.
Cons of hourly employees
You must pay hourly workers extra compensation if they work more than 40 hours in a workweek, which may be expensive if the job necessitates a lot of overtime. Most states define overtime pay as “time and a half,” which is 1.5 times the employee’s regular hourly rate.
Additionally, you must keep track of the hours worked by hourly employees, which may be challenging if their schedules are inconsistent or if you are not utilizing the right digital tools, such as a time and attendance system. With hourly workers, recordkeeping becomes even more critical.
What jobs pay hourly?
Due to specific federal and state restrictions, many employees in labor-intensive and service-based employment are paid hourly. These jobs may pay significantly more than the national average since some of them may be union employment.
- Construction workers ($38,757)
- Waiters and bartenders ($19,602 and $22,950)
- Retail sales employees ($28,677)
- Medical professionals ($44,311)
- Repair and maintenance workers ($53,004)
- Automotive service workers ($50,687)
- Aircraft maintenance technicians ($50,687)
What are exempt and nonexempt employees?
You must ascertain if the occupations are federally exempt or nonexempt before deciding whether to hire salaried or hourly workers.
What is an exempt employee?
Exempt employees are individuals who are not entitled to receive overtime pay for any time worked in excess of 40 hours under federal law. An exempt worker fulfils the following requirements:
- They are paid at least $35,568 year, or $684 each week.
- They are paid on a salary.
- They satisfy the standards under the Fair Labor Standards Act’s exemption work duties (FLSA).
An employee is not exempt if they fall short of all three criteria.
What is a nonexempt employee?
If a nonexempt employee works more than 40 hours per week, you must pay them at least the federal, state, or local minimum wage, plus overtime compensation (time and a half). Nonexempt employees are those who are qualified for overtime compensation but do not fulfil the requirements to be classified as exempt workers. Among those employed in these positions are freelancers, interns, contractors, and servers.
While some states have additional legislation for identifying exempt and nonexempt personnel, these standards are based on federal law. Before categorizing your personnel, be sure to review your state’s labour regulations. Exempt vs. Nonexempt: What Is the Difference? is a related article.
Misclassifying nonexempt employees
Accuracy in employee classification is crucial since misclassifying people frequently gets small organizations into difficulty. When a person is mistakenly classified as exempt when they are not, a firm may be forced to pay back wages. Furthermore, according to various state legislation, back pay must be paid within a particular amount of time. Failure to do so may result in daily fines that increase until those earnings are fully paid.
Classifying exempt as nonexempt
Most of the time, there are no fines or penalties associated with classifying an exempt worker as nonexempt. Since they will earn overtime compensation and other advantages that they would not otherwise receive if they were categorized as exempt, it may even be advantageous for the employee. However, if that person works overtime, the company would be forced to pay costs that are not mandated by law. Unless measures are in place to restrict extra hours, this may attract great personnel but might become fairly expensive.
Can you switch employees between salaried and hourly?
An hourly employee can be converted to a salaried one, while a salaried one can become hourly. However, before you make the modification, it’s crucial to be aware of the relevant laws and guidelines.
Making an hourly employee salaried
As long as the worker complies with FLSA criteria and state regulations that entitle them to be exempt, you may convert an hourly worker to a salaried employee. If they are moving on a new role or if you are restructuring your staff, you might choose to do this.
Making a salaried employee hourly
Although it is less often, you might want to think about making your employee an hourly employee if your business is reorganized or you have less work than you anticipated. You would need to confirm that their contract doesn’t forbid you from doing this.
You might also need to change the job description for them. If their previous position required them to complete a project no matter how long it took, you would need to change it to accommodate a 40-hour workweek or specify that they will now be compensated for additional hours worked.
Determining wages for a worker going from salaried to hourly
When you convert a salaried worker to an hourly role, you must set a new hourly rate, which may be less than what they were previously paid per hour, depending on whether or not they will work more overtime. If that’s the case, go cautiously and handle this situation delicately. It’s not advisable to convert a salaried employee to an hourly rate unless you have no other choice.
Most essential, make sure to inform your staff of wage and hour regulations so they are aware of what they are consenting to. This will support maintaining productivity and morale.
How to determine if hourly or salaried employees are best for you
When deciding whether your staff should be paid on a salary or an hourly basis, there is no right or wrong answer. The primary distinction is that salaried employees will get an annual salary that is paid continuously throughout the course of the year. An hourly worker, on the other hand, is compensated simply for the time they put in. Asking yourself the following questions can help you decide.
What type of work will the employee be doing?
The worker’s exempt or nonexempt status is the main consideration. The FLSA requires that they be paid on an hourly basis if they are considered nonexempt, thus that choice is made for you. If there isn’t enough steady employment, you might still want to think about paying a paid person hourly. On the other hand, it can be more economical to give an employee a wage if they would consistently work more than 40 hours each week.
Are there any relevant state laws to consider?
Employees may be classified as nonexempt under state legislation even though they are exempt under federal law. It is crucial to understand the rules and regulations in your area because of this. For instance, in California, a worker must earn twice the state minimum wage—more than the amount necessary by federal law—to qualify for exemption.
What is the current trend in the job market?
The majority of the U.S. workforce is paid hourly, according to data from the U.S. Bureau of Labor Statistics. 55.8% of all employees in 2021 were paid on an hourly basis as opposed to a salary. However, it was down from earlier years when more than 58% of the workforce was employed on an hourly basis and was up from 55.5% in 2020.
The serious repercussions of the COVID-19 epidemic are reflected in this drop in the percentage of hourly employees. Retail outlets, restaurants, and museums are just a few of the businesses that were impacted by shutdowns and paid staff on an hourly basis. The time it took for these kinds of enterprises to reopen was the longest, and many of them had permanent closures. Additionally, many workers sought out new employment during the Great Resignation in a variety of industries, with a significant portion of them switching from hourly to paid roles.
Do you want to include benefits in their compensation package?
Even while hourly workers are eligible for benefits, tracking benefits for salaried staff is significantly simpler. This should not be the deciding element in determining whether to pay someone an hourly wage or a salary, but it should be taken into account.
Whether your employees should be paid or hourly has no clear-cut right or wrong answer. Even while you must abide by federal and state rules, you still have the freedom to decide what is best for your business. In the end, what matters most is that you and your staff are content with the circumstances and that your firm is operating efficiently.