Salary vs Hourly: What to Know When Changing Pay Structure

Originally published 12/2/2023; updated 1/9/2025

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 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.  

Hourly Pay

This compensation structure simply pays the worker for the number of hours worked. 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. 

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 Fair Labor Standards Act (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 employees' timekeeping and record-keeping requirements and make sure the employees know 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.