When hiring an employee, you must make a lot of decisions. One of the most important is whether you will offer them a salaried or hourly position.
Salaried employees are usually paid the same amount each pay period, based on their total salary. An hourly worker, on the other hand, earns a set payment for each hour they work. For example, if they earn $20 per hour and work eight hours in a day, they would earn $160 for that day (before taxes).
There are pros and cons to both options. Knowing the differences between them and the laws that govern them will help you make this decision.
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A salaried employee gets paid a set amount based on an annual salary they agreed upon with the employer. The employee’s pay is based on a 40-hour workweek. However, even if they work more or less than 40 hours in a given week, they will still earn the same amount. For this reason, salaried workers are not eligible for overtime pay. You may have a weekly, biweekly, semimonthly or monthly pay schedule for them.
Since salaried workers are paid a flat rate, if they work more than 40 hours in a week, you will not need to pay them overtime. This offers flexibility in hours, which can be a draw to workers and can benefit businesses in busy times when they need all hands on deck.
Hiring salaried employees will also make your payroll easier to process, as there is not much fluctuation in pay. Streamlining payroll means less labor in the accounting department and makes it easier to automate processes in your payroll software.
Since salaried workers have a fixed income, there is a chance they’ll work less than 40 hours in some weeks. In addition, since they aren’t clocking in and out each day, they can come in late or leave early without as much accountability. However, salaried workers are often high-level employees who understand the expectations for them and wouldn’t abuse the flexibility their salary affords.
You should also consider the amount and quality of work that high-level employees accomplish in the time they give your company, rather than just the number of hours they technically spend in their seat. Oftentimes, salaried employees are those that have demonstrated their value to the company and are personnel you want to keep long term.
Salaried employees are paid a fixed amount each pay period. In other words, these workers aren’t bound to a 40-hour workweek and are paid the same whether they work more or less than 40 hours.
Salaried positions exist nearly in every field and industry, and most management jobs or positions with supervisory duties are salaried. These are some common salaried jobs and their nationwide median salary, according to Salary.com:
An hourly employee is paid a certain rate per hour of work. Depending on the state in which you operate, hourly employees are typically required to be paid time and a half for any time they work beyond 40 hours in a week. You can pay hourly workers at the same frequency you pay salaried workers, but their paychecks will fluctuate based on the exact number of hours they work.
Additionally, you can maintain a stable of hourly workers to ensure you have the flexibility you need to cover your operations. This is important in businesses that experience busy seasons or that want to be sure they have backup options in case regular employees are unavailable.
If an hourly worker does work over 40 hours in a week, you are required to pay them overtime wages, which can become costly if the position requires a lot of overtime. In most states, overtime is paid at 1.5 times the worker’s regular hourly wage, known as “time and a half.”
You are also required to track hourly workers’ hours, which can be difficult if their hours are not consistent or you aren’t using the correct digital tools, like a time and attendance system. Recordkeeping becomes even more important with hourly workers.
An hourly worker gets paid a set amount for each hour they work. As the employer, you must record how many hours those employees work in order to pay them each pay period. Hourly workers are also eligible for overtime pay, typically time and a half, for each hour they work over 40 hours.
Many workers with labor-intensive and service-based jobs are paid hourly due to certain federal and state laws. Some of these jobs may be union jobs and thus pay much higher wages than the average.
Before determining if you should have salaried or hourly employees, you must determine whether the positions have federally exempt or nonexempt status.
On a federal level, exempt employees are those who are not eligible to get paid overtime for any time worked over 40 hours. An exempt employee meets these criteria:
If an employee does not meet all three of these requirements, they are nonexempt.
You must pay nonexempt employees at least the federal, state or county/city minimum wage (whichever is higher) and overtime pay (time and a half) for any time worked over 40 hours in a week. Any worker who is eligible for overtime pay and does not meet the criteria to be considered an exempt employee is nonexempt. Workers in these jobs include contractors, freelancers, interns and servers, to name a few.
These requirements are based on federal law, and some states have additional laws for determining exempt and nonexempt employees. Make sure to check your state labor laws before classifying your employees. [Related article: Exempt vs. Nonexempt: What Is the Difference?]
Many small businesses get into trouble when they misclassify employees, so accuracy in employee classification is critical. This can result in a business being required to pay back wages when they classify someone who is actually nonexempt as exempt. Additionally, some state laws mandate that the back wages be paid within a certain time frame. Failure to do so can result in additional daily fines until those wages are paid in full.
Classifying an exempt employee as nonexempt usually does not result in any fines or penalties. It can even be beneficial for the employee, since they will receive overtime pay and other benefits they would not get when classified as exempt. However, if that employee is working overtime, the employer would incur expenses they are not legally required to pay. This may attract top talent but could become rather expensive unless policies are in place to limit overtime hours.
An exempt employee is not eligible for overtime pay, while a nonexempt worker must be paid extra for any time over 40 hours that they work in a given workweek. You may face fines if you don’t properly classify your employees.
It is possible to switch an hourly worker to a salaried one, as well as make a salaried worker hourly. However, it’s important to know the rules and regulations associated with doing so before you make the change.
You can convert an hourly employee to a salaried employee as long as the worker meets FLSA requirements and state laws that qualify them to be exempt. You can decide to do so if they are going to be taking on a new position or if you are reorganizing your team.
While this is less common, if you reorganize your company or have less work for your employee than you thought you would, you may want to consider making them hourly. You would need to make sure there is nothing in their contract to prevent you from doing this.
In addition, you may need to alter their job description. If their original job required them to work until a project is finished regardless of how long it takes, you would need to rework it to comply with a 40-hour workweek or state that they will now receive overtime if they do work more.
When you change a salaried employee to an hourly position, you will need to determine a new hourly rate, which may be less per hour than what they were previously paid, if they will work more overtime. If this is the case, tread lightly and treat this matter with the utmost sensitivity. Switching an employee to hourly from salaried is not recommended unless you have no other option.
Most importantly, educate your employees on wage and hour laws so they know what they are agreeing to. This will help keep morale and productivity up.
Employees can be switched from hourly to salaried, and vice versa. However, when switching a worker from salaried to hourly, you need to determine their new hourly pay rate. Before making any changes, check their contract, if they have one, to ensure you are not bound to keep them at their original classification.
There is no right or wrong answer when determining whether your employees should be salaried or hourly. The main difference is that you’ll offer salaried workers an annual pay that will be paid consistently throughout the year. Conversely, an hourly worker is paid only for the hours they work. To make your decision, ask yourself the following questions.
The biggest factor is whether the worker is exempt or nonexempt. If they are classified as nonexempt under the FLSA, they must be paid hourly, which takes care of the decision for you. However, you may still want to consider making a salaried employee hourly if there is not enough consistent work. On the other hand, if an employee is going to be working more than 40 hours a week regularly, it might be more cost-efficient to pay them a salary.
Even if employees are exempt on a federal level, there may be state laws that classify them as nonexempt. For this reason, it is important to be familiar with the laws and regulations in your region. For example, in California, for a worker to be exempt, they must make twice the state minimum wage, which is higher than the federal law’s required amount.
Based on data from the U.S. Bureau of Labor Statistics, most of the U.S. workforce is paid on an hourly basis. In 2021, 55.8% of all workers received an hourly wage rather than a salary. That was up from 55.5% of workers in 2020, but down from years prior when more than 58% of the workforce was paid an hourly wage.
This decline in percentage of hourly workers reflects the drastic effects of the COVID-19 pandemic. Many of the companies that were affected by shutdowns paid employees on an hourly basis, such as retail stores, restaurants and museums. These types of businesses took the longest to reopen, and many businesses closed their doors forever. Moreover, during the Great Resignation, many employees looked for new jobs in different fields, a great number of whom transitioned from hourly positions to salaried ones.
While you can offer benefits to hourly employees, it is much easier to track the benefits of a salaried employee. This does not need to be a deciding factor in whether you make someone hourly or salaried, but it is something to consider.
There is no set answer to whether your workforce should be salaried or hourly. While you must follow federal and state laws, there is still room for you to make decisions based on what is best for your company. In the end, what counts most is that you and your employees are happy with the situation and your business runs smoothly.
Elizabeth Veras contributed to the writing and reporting in this article.