When hiring employees, you must decide whether to pay them a salary or an hourly wage. Salaried employees receive a fixed amount of pay each pay period based on their annual salary. On the other hand, hourly workers are paid a set amount for each hour they work.
Salaried employees offer stability in pay, while hourly workers provide flexibility in scheduling. Understanding the differences between the two types of compensation and the laws that apply to them can help you choose the right option for your business.
Consider the pros and cons of each type of worker, the regulations that govern them, and factors to consider when making your decision.
What is a salaried employee?
A salaried employee receives a fixed amount of money agreed upon with the employer each year. This amount is based on a 40-hour workweek, but they get paid the same amount whether they work more or less than 40 hours. Salaried employees do not receive overtime pay. Their pay schedule can be weekly, biweekly, semimonthly, or monthly.
A salaried employee earns the same annual wage regardless of the number of hours worked. For example, if someone earns $60,000 a year and is paid twice a month, they would receive $2,500 per paycheck. Salaried employees receive their salary in regular installments and may be exempt or nonexempt from overtime pay rules based on their job responsibilities and income.
Salaried employees may receive retirement plans, health insurance, paid time off, and vacation pay. They usually hold managerial or senior positions, have more autonomy and responsibility, and may need to work extra hours to meet business needs.
Pros of salaried employees
Salaried workers are paid a fixed amount no matter how many hours they work, which means they only get overtime pay for working up to 40 hours a week. This system offers flexibility in hours, which can attract workers and help businesses during busy times. Paying salaried employees also simplifies payroll processing, making it easier to manage and automate. Salaried employees receive the same pay each paycheck, even if they work extra hours. This system provides predictability in payroll, as employees know precisely what to expect. There are several benefits to hiring salaried employees, including consistent pay, benefits like sick leave and health insurance, opportunities for career advancement, higher earning potential, and more flexibility in work hours.
Cons of salaried employees
Salaried workers receive a fixed income, regardless of the number of hours they work. They may work less than 40 hours in some weeks and have some flexibility in their work hours.
There are some drawbacks to being a salaried employee:
1. Fixed Pay: Salaried employees receive a set wage, which may lead to dissatisfaction if they feel their efforts need to be recognized.
2. Lack of Overtime Pay: Salaried employees typically do not receive overtime pay for working more than 40 hours a week.
3. Limited Flexibility: Salaried employees may need more flexible schedules than hourly workers.
4. Higher Workload: Salaried employees may have a heavier workload than hourly workers, which can lead to dissatisfaction.
5. Difficulty Negotiating Pay: Salaried employees may find it challenging to negotiate their salary, as it is usually fixed.
Despite these cons, salaried employees are vital contributors to the company and are often valuable long-term assets.
What is an hourly employee?
Hourly workers are paid based on their work hours, typically receiving a specific hourly rate. In some states, they must be paid time and a half for any hours worked beyond 40 in a week—hourly employees. Industries like retail, hospitality, and food service often employ hourly workers. These workers are paid weekly or biweekly, depending on their work hours. Hourly workers make up over half of wage workers in the U.S. Payment frequency for hourly employees can be the same as for salaried employees, but their pay varies based on their weekly work hours. For example, if an hourly employee is paid $10 per hour, working 40 hours in one week would earn them $400, while working 20 hours the next week would earn them $200.
Pros of hourly employees
You are not obligated to offer full-time employment to hourly workers, which can save you money on benefits like health insurance and paid time off. A team of hourly workers allows you to be flexible and better manage busy seasons or unexpected employee absences. Hourly workers are not guaranteed a set number of hours each week, allowing you to adjust their schedules based on your needs. Hiring hourly workers can help reduce costs for benefits provided to full-time employees, making it a smart choice for many businesses. Hiring hourly workers also offers benefits such as saving money during slow periods, flexibility in scheduling, reduced liability for benefits, ease of hiring, and potentially increased productivity due to the motivation of hourly pay.
Cons of hourly employees
Workers who work more than 40 hours a week must be paid overtime wages, which can be costly. Overtime pay is typically 1.5 times the worker’s regular hourly wage. It is essential to keep track of hourly workers’ hours accurately to avoid any issues.
One drawback of having hourly employees is the potential cost of overtime pay if they work more than 40 hours a week. It is also essential to accurately track and record their hours. Hourly workers may have limited flexible schedules and receive different benefits than salaried employees, such as health insurance or retirement plans.
Additionally, hourly workers may have higher turnover rates, increasing recruiting costs. Compared to salaried employees, career advancement opportunities may also be limited for hourly employees.
What jobs pay hourly?
Many construction, hospitality, retail, healthcare, and automotive services jobs pay workers based on the hours worked. For example, construction workers, servers, bartenders, retail sales employees, medical professionals, repair and maintenance workers, automotive service workers, and aircraft maintenance technicians are often paid hourly.
Construction workers who build structures and infrastructure earn about $38,757 per year. Servers rely on tips in addition to their base wage, making around $19,602 annually, while bartenders make about $22,950. Like cashiers and associates, retail sales employees earn about $28,677 annually. Medical professionals, such as medical assistants and home health aides, earn roughly $44,311 annually. Repair and maintenance workers who fix equipment and systems earn around $53,004 annually. Automotive service workers, like mechanics, earn about $50,687 annually. Aircraft maintenance technicians inspecting and repairing planes earn about $50,687 annually.
These jobs offer growth and skill development opportunities and may include benefits like health insurance and retirement plans. If considering an hourly job, it’s essential to research the industry to understand potential earnings and advancement opportunities.
What are exempt and nonexempt employees?
Before deciding between salaried and hourly employees, you must determine if the positions are exempt or nonexempt. Exempt workers must fulfill their duties even if they work more than 40 hours per week without extra pay. Nonexempt workers receive 1.5 times their regular pay for hours worked over 40 a week. Misclassifying employees can have severe legal and financial consequences for businesses.
What is an exempt employee?
Exempt employees on a federal level are not entitled to overtime pay for working more than 40 hours a week. To qualify as an exempt employee:
1. They must earn at least $35,568 annually ($684 per week).
2. They must be paid a salary.
3. They must meet the job duty requirements under the Fair Labor Standards Act (FLSA).
Employees who do not meet all these criteria are considered nonexempt. The FLSA, a federal law, sets rules for minimum wage, overtime pay, and recordkeeping. Employees’ salary level does not determine their exempt status from overtime pay; factors like their pay and job responsibilities are more important.
What is a non-exempt employee?
Nonexempt employees are typically contractors, freelancers, interns, or servers. Following federal and state laws when classifying employees is important, as some states have additional rules. Employers must keep accurate records of nonexempt employees’ hours and pay them appropriately. Misclassifying employees can lead to legal and financial consequences for businesses.
Misclassifying nonexempt employees
It’s essential for small businesses to correctly classify their employees because mistakes can lead to penalties and fines. This can also result in legal fees and court costs. According to the Fair Labor Standards Act (FLSA), exempt employees do not qualify for minimum wage or overtime pay, while nonexempt employees do. Incorrectly categorizing a nonexempt employee as exempt could mean losing overtime pay. Employers may face investigations by the Department of Labor and other authorities if they suspect misclassification. To avoid these issues, businesses should carefully review employees’ job duties and pay to determine if they meet the criteria for exemption under the FLSA. If unsure, it’s best to consult with an employment law attorney or human resources expert if you need more clarification.
Classifying exempt as nonexempt
Reclassifying an employee from exempt to nonexempt can benefit the employee by allowing them to receive overtime pay. However, it can also lead to extra expenses for the employer if the employee works overtime. Classifying employees correctly as exempt or nonexempt is crucial because it determines overtime pay eligibility. Misclassifying employees can result in legal issues, fines, and penalties. Employers should understand the rules determining exempt and nonexempt status based on income level and job responsibilities.
Can you switch employees between salaried and hourly?
It’s possible to change an hourly worker to a salaried one or switch it to an hourly one. However, it’s crucial to understand the rules and laws before making any changes. Before switching from salary to hourly pay, employers must ensure the employee meets the requirements for nonexempt status under the Fair Labor Standards Act. This means the employee’s duties and pay must align with hourly work, and they must receive overtime pay for hours worked beyond 40 per week.
The employer must determine if an employee is exempt from FLSA overtime rules before changing their pay from hourly to salary. This exemption means the employee isn’t eligible for overtime pay because their job description and income meet the criteria for exempt status.
Employers should be cautious about changing an employee’s classification, which can lead to legal and financial repercussions. If an employee is misclassified, the employer might have to pay back wages and legal fees. If there’s uncertainty about classifying an employee, it’s best to review FLSA guidelines thoroughly and seek advice from a legal professional.
Making an hourly employee salaried
An employer can change an hourly worker to a salaried position if the employee meets specific requirements under the Fair Labor Standards Act (FLSA) and state laws. Before offering a salary increase, the employer must determine if the hourly worker is exempt from receiving overtime pay according to the FLSA.
Employers must follow the rules and regulations when changing an hourly employee to a salaried one to avoid legal issues and fines. Consulting with an employment law attorney or HR consultant specializing in this area can help ensure compliance with all laws.
Making a salaried employee hourly
Converting a salaried worker to an hourly employee is a big decision that requires careful planning. Here are some essential things to consider:
1. Understand why you want to make the change: There can be various reasons, such as following labor laws, fairly compensating for overtime, or linking pay to productivity. Know why you are making this shift.
2. Research state and federal laws: Before changing an employee’s pay structure, ensure you understand the labor regulations regarding overtime pay, breaks, and rest periods.
3. Determine the hourly rate: Calculate the new hourly wage by dividing the yearly salary by the number of hours worked. For example, if someone earns $50,000 a year and works 2,000 hours annually, their hourly rate would be $25.
4. Communicate the change: Inform the employee about the shift promptly. Be transparent about the reasons behind the change and how it will impact their pay. It’s advisable to provide a written agreement detailing the new hourly rate, benefits or vacation time adjustments, and other relevant information.
5. Monitor the impact: Track how the change affects the employee over time. Ensure that the new hourly rate aligns with their duties and address any issues that may arise promptly to ensure a smooth transition.
Determining wages for a worker going from salaried to hourly
When you change a salaried employee to an hourly position, you’ll need to determine a new hourly rate, which may be less per hour than their previous pay rate, especially if they will be working more overtime. It’s important to handle this change with care and respect for the employee. It’s also essential to make sure your employees understand wage and hour laws so they know their rights. This can help boost morale and productivity in the workplace.
When calculating the new hourly rate for an employee transitioning from a salary to an hourly position, start by finding their current hourly wage and salary. Consider the employee’s duties, qualifications, experience, and state or federal minimum wage laws. Factor in any changes in the employee’s role and responsibilities, and calculate the new hourly rate by dividing their annual income by the number of hours they work annually. Remember to account for benefits like health insurance, retirement plans, and vacation time. If the employee loses benefits by switching to hourly, they may need a raise in pay per hour to compensate.
Ensure the employee is correctly classified as exempt or nonexempt, and review your company’s policies on overtime pay. Exempt employees do not qualify for overtime pay if they work more than 40 hours a week, while nonexempt employees do.
How to determine if hourly or salaried employees are best for you
Deciding whether to pay your employees a salary or an hourly wage can depend on various factors. Here are some things to consider when making this decision:
1. Workload: If your business has fluctuating workloads, hiring employees on an hourly basis may be more cost-effective. You can adjust their hours based on the workload, which can help you save on labor costs.
2. Experience and expertise: If your company requires specific knowledge or skills, salaried workers may be a better option than hourly workers. It can be challenging to find highly experienced hourly workers for specialized tasks.
3. Budget: Salaried workers typically cost more than hourly workers because they receive health insurance and vacation pay benefits. If you’re on a tight budget, hiring hourly workers may be a more affordable choice.
4. Management style: If you want to offer employees flexibility in their work schedules, hiring them hourly may be a better fit.
These factors can help you determine whether to hire salaried or hourly workers for your business.
What type of work will the employee be doing?
However, employers may consider paying a salaried employee hourly if their workload fluctuates. Conversely, if an employee consistently works 40 hours a week, it might be more cost-effective to pay them a salary.
Employers should clearly outline the tasks and responsibilities of the job when hiring employees. For instance, a sales representative may have to attend client meetings, give presentations, and take orders. An accountant’s duties involve managing finances, filing taxes, and generating reports. Customer service professionals may need to respond to inquiries, address complaints, and process purchases.
Employers should also ensure that potential hires have the necessary training and experience. Conducting pre-employment assessments, checking references, and conducting thorough interviews are effective ways to assess a candidate’s qualifications. Providing employees with a detailed job description and clear expectations can help them understand their roles and perform their duties effectively.
Are there any relevant state laws to consider?
It’s essential to understand the regulations in your area. For example, in California, for an employee to be exempt, they must earn double the state’s minimum wage, which is higher than the federal requirement. Before starting a business, it is crucial to research the relevant state laws that may apply. For instance, regulations for medical professionals like doctors and nurses can vary significantly from state to state. Similarly, restaurant licensing requirements and food storage and preparation laws may differ across states. Employment, tax, and environmental regulations vary from state to state. It is essential to understand these regulations to ensure compliance with the law. Consulting with a lawyer or industry professional can help better understand and adhere to state laws.
What is the current trend in the job market?
This drop is due to the impact of the COVID-19 pandemic, which caused many hourly workers in industries like retail, restaurants, and museums to lose their jobs as businesses shut down. Some of these businesses never reopened.
During the pandemic, many workers switched jobs, with some moving from hourly positions to salaried ones. Employers are now more open to remote work, with many businesses allowing employees to work from home using virtual tools.
The pandemic also increased the demand for healthcare, technology, and e-commerce jobs due to the rise in healthcare needs, digital products, and online shopping.
Conclusion:
In conclusion, when deciding whether to offer a salary or hourly pay in your business, it is essential to consider your company’s specific needs and goals. Salary may be better for providing stability and attracting experienced professionals, while hourly pay offers flexibility and cost-control benefits. Ultimately, the choice between salary and hourly pay will depend on your business model, industry, and workforce requirements.