When hiring employees, many decisions must be made. One of the most pressing is whether you will offer a new employee a salaried (exempt) or hourly (non-exempt) position. Both designations have their pros and cons. Thankfully, this decision can be made easier if you understand the differences between salary and hourly wages and have a good grasp of the laws that govern them.
Of course, an understanding of these factors is perhaps even more important if you want to change a pay structure with established employees. Read the helpful information outlined below to learn more about salary vs hourly:
Salaried Pay
Exempt, salaried employees earn a fixed salary per pay period. This can be paid either weekly, bi-weekly or semi-monthly. An exempt, salaried employee can work any reasonable number of hours per week. However, they will still receive the same amount of compensation as outlined by their offer letter or employment agreement, the salary amount cannot be lower than the Fair Labor Standards Act (FLSA) threshold, and the role must pass the FLSA duties test for exempt status.
Overtime is not a benefit received by exempt employees. If a salaried employee were to be paid overtime, they would be classified as salaried, non-exempt. Non-exempt, salaried employees receive a flat salary for the first 40 hours of their workweek, and because they are non-exempt under the FLSA, they receive overtime pay for any hours worked in excess of 40 per week.
Pros of Salaried Employees
There are many benefits of utilizing a salaried structure for your employees. The following are some of the most applicable:
- Salaried employees make it easier to budget and track payments in a company because there is less fluctuation in pay.
- Even if your exempt, salaried workforce works over their assigned hours, you will only have to pay them the agreed-upon salary amount. Of course, it’s wise not to push this as taking advantage of your employees will eventually cause them to leave for a better environment.
- You also don’t want them frequently working much less than agreed upon. A level of trust and accountability is necessary for this structure to work. (Keep in mind that if your employee is non-exempt, even if they are paid a salary, they will be eligible for overtime under Federal law.)
- Salaried employees often earn more than hourly employees and the rate of pay must be above the FLSA’s salary threshold for the role. Salaried roles may have a perception of being more “professional” and long-term than hourly roles.
- Financial anxiety can be reduced on both the part of the employee and the part of the owner by having the steadiness of this pay structure. After all, the same amount is going out or expected, regardless of the hours an employee works.
Cons of Salaried Employees
Though it’s beneficial for many, there are some drawbacks to having salaried employees, some of which are outlined below:
- There is no overtime pay for exempt, salaried employees. Extra work hours beyond what is assigned are not compensated for, which is something that inconsiderate managers could take advantage of, leading to unhappy employees, burnout, and turnover.
- Some exempt, salaried employees may feel they are being paid less than they would if they were hired as hourly employees due to overtime pay.
Hourly Pay
This compensation structure simply pays the worker for the number of hours worked, and total wages can vary from week to week based on the number of hours an employee works. While there might be some regularity, it is not as predictable as salary pay.
Non-exempt, hourly employees receive overtime pay equal to one and a half times their hourly rate. Though most full-time employees are eligible for benefits, some hourly workers may be excluded from participation or may receive lesser benefits, as this is up to the individual company. An hourly employee’s hours are usually logged on a timecard or in an electronic timekeeping system, then verified by the payroll department.
Pros of Hourly Pay
There are some benefits to this type of pay structure, a few of which are outlined below:
- Companies can schedule hours proactively based on demand. Costs are reduced this way as workforce planning is more agile. This may be especially advantageous for employers that don’t operate on a traditional 8-to-5, Monday through Friday workweek. Hourly workers can be scheduled so they don’t ever have to work overtime, keeping payroll expenses low.
- Employees who work fewer hours than their salaried counterparts can also benefit from flexibility in hours.
Cons of Hourly Pay
The following are some noteworthy disadvantages of this type of pay and employment structure:
- Having scheduling issues and overtime expenses can be quite costly for a company that doesn’t keep a good eye on hours or plans out its workforce well.
- Due to being hourly, these employees may not be as invested as salaried workers in the company’s growth or future.
Switching Between Salaried and Hourly?
If you are contemplating making the change from salaried to hourly or hourly to salary, consider the following factors:
- Determine whether the employee should be classified as exempt or nonexempt under the FLSA, based on the job duties they perform. If the role does not pass the FLSA duties test, the role must be classified as non-exempt, which means that whether or not you pay them a salary, they must track their hours and will be eligible for overtime pay.
- Calculate the employee’s salary. In the case of salaried-exempt employees, you must pay the highest salary or benefit amount required by the FLSA or state (federal employees pass the FLSA earnings test if they earn at least $684 weekly (which equates to $35,568 annually), along with meeting other factors).
- Ensure the employee is aware of the switch and agrees to the change. Even if it would benefit your business if the change would make it harder on employees, take this into consideration when deciding your next steps.
- Outline the employee’s timekeeping and recordkeeping requirements and make sure the employee knows what is expected of them.
- Update your HR and payroll systems as necessary to meet the changing needs.
Which Option Makes Sense for Your Business?
If you still aren’t sure of the appropriate payment structure for your business, ask yourself the following questions:
- What type of work will the employee be doing?
- What state laws should be considered?
- What is the current trend in the job market?
- What benefits do I want to include in their compensation package?
- How can I be competitive in the current job market?
Bottom Line: Compliance is Key
Unfortunately, there is no definitive answer as to whether your employees should be salaried or hourly, exempt or non-exempt. Of course, you have to follow federal and state laws, and that’s an important place to start. However, within the guidelines of the FLSA, you are still given the freedom to make the right decision for your business.
The most important aspect to consider is keeping your business running smoothly, your teams adequately staffed, and your employees satisfied no matter what arrangement you pursue. Feel free to contact us to learn more about the benefits of each type of pay structure and how to make the change between the two if that is your goal.
Originally published 8/17/22 - Updated 12/1/23
