When hiring employees, you have to 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. Hourly workers, on the other hand, get 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.
Regardless of the number of hours worked, a salaried employee earns the same annual wage. 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 non-exempt from overtime pay rules based on their job responsibilities and income.
Salaried employees may receive benefits like 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 don’t get overtime pay for working more than 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. Even if they work extra hours, salaried employees receive the same pay in each paycheck. This system provides predictability in payroll, as employees know exactly 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 are not 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 have less flexibility in their schedules compared to 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 jobs are salaried?
Salaried jobs are common in many fields and industries. These jobs offer a fixed annual income, providing stability for employees. Here are some examples of salaried positions and their median salaries nationwide, according to Salary.com:
1. Teacher ($63,645): Teachers shape young minds and help students succeed. Their salaries can vary based on experience and education level.
2. Professor ($161,343): Professors teach advanced knowledge at colleges and universities, with higher salaries due to their expertise and education requirements.
3. Librarian ($68,416): Librarians organize information and assist people in research, adapting to digital resources while maintaining traditional roles.
4. Civil Engineer ($71,489): Civil engineers design and oversee infrastructure projects like roads and bridges, ensuring their safety and functionality.
5. Accountant ($58,431): Accountants handle financial records and tax preparation for individuals and businesses, ensuring financial accuracy and compliance.
6. Restaurant Manager ($57,189): Restaurant managers oversee daily operations, manage staff, and maintain quality standards in a challenging yet rewarding role.
7. Pharmaceutical Researcher ($127,903): Researchers develop and test new drugs, contributing to healthcare advancements and patient well-being.
8. Financial Analyst ($61,772): Analysts provide financial insights based on data analysis, helping individuals and corporations make informed investment decisions.
9. Lawyer ($99,490): Lawyers offer legal advice, represent clients, and handle legal matters, requiring extensive education and expertise.
10. Doctor ($156,001): Doctors diagnose and treat medical conditions, earning high salaries due to their expertise and years of education.
These roles offer stability, financial security, and growth opportunities, making them attractive career choices.
What is an hourly employee?
Hourly workers are paid based on the hours they work, typically receiving a certain rate per hour. 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 the hours they work. 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 the hours they work each week. 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. Having 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, giving you the freedom 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
If a worker works more than 40 hours in a week, they must be paid overtime wages, which can be costly. Overtime pay is typically 1.5 times the worker’s regular hourly wage. It is important 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 important to accurately track and record their hours. Hourly workers may have limited flexibility in their schedules and may not receive the same benefits as salaried employees, such as health insurance or retirement plans.
Additionally, turnover rates may be higher for hourly workers, leading to increased recruiting costs. Career advancement opportunities may also be limited for hourly employees compared to salaried employees.
What jobs pay hourly?
Many jobs in industries like construction, hospitality, retail, healthcare, and automotive services pay workers based on the number of hours worked. For example, construction workers, waiters, 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. Waiters rely on tips in addition to their base wage, making around $19,602 annually, while bartenders make about $22,950. Retail sales employees, like cashiers and sales associates, earn about $28,677 per year. 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 per year. Automotive service workers, like mechanics, earn about $50,687 annually. Aircraft maintenance technicians who inspect and repair planes earn about $50,687 per year.
These jobs offer opportunities for growth, skill development, and may include benefits like health insurance and retirement plans. It’s important to research the industry to understand potential earnings and advancement opportunities if considering an hourly job.
What are exempt and nonexempt employees?
Before deciding between salaried and hourly employees, you need to determine if the positions are exempt or nonexempt. In the US, employees are categorized as exempt or nonexempt based on their eligibility for overtime pay under the Fair Labor Standards Act (FLSA). Exempt employees are not entitled to overtime pay, while nonexempt employees are. Exempt workers must fulfill their job 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 in a week. Misclassifying employees can have serious 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 per year ($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).
If an employee does not meet all these criteria, they are considered nonexempt. The FLSA is a federal law that sets rules for things like minimum wage, overtime pay, and recordkeeping. Exempt employees are often paid a fixed amount regardless of how many hours they work each week because their jobs are typically executive, administrative, or professional. An employee’s 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 must be paid at least the minimum wage, whether it is federal, state, or local, and receive overtime pay (one and a half times their regular rate) for any hours worked over 40 in a week. Nonexempt employees are typically contractors, freelancers, interns, or servers. It’s important to follow both federal and state laws when classifying employees, as some states have additional rules. If you work more than 40 hours in a week and are not exempt from overtime pay, you are considered nonexempt. Nonexempt employees are usually paid hourly and receive overtime pay for any hours worked beyond 40 in a week. Employers must keep accurate records of nonexempt employees’ hours worked and pay them appropriately. Misclassifying employees can lead to legal and financial consequences for businesses.
Misclassifying nonexempt employees
It’s very important for small businesses to correctly classify their employees because mistakes can lead to penalties and fines. For example, if a business labels a nonexempt employee as exempt, they may have to pay back wages and face daily fines until the wages are paid. 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 out on 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 an employee’s 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.
Classifying exempt as nonexempt
Reclassifying an employee from exempt to nonexempt can have benefits for the employee, like receiving 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 important because it determines overtime pay eligibility. Misclassifying employees can result in legal issues, fines, and penalties. Employers should understand the rules that determine exempt and nonexempt status based on factors like income level and job responsibilities. Job titles alone should not determine exempt status; individual job duties need to be considered. Employers must pay overtime to workers who were wrongly classified as exempt and may have to pay back wages, penalties, and legal fees if misclassification is discovered.
Can you switch employees between salaried and hourly?
It’s possible to change an hourly worker to a salaried one or switch a salaried worker to hourly. However, it’s crucial to understand the rules and laws before making any changes. Before switching from salary to hourly pay, employers must make sure the employee meets the requirements for non-exempt 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.
It’s the employer’s responsibility to 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, as it 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 how to classify 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 certain requirements under the Fair Labor Standards Act (FLSA) and state laws. This can happen if the worker is taking on a new role or if the team is being reorganized. Before offering a salary increase, the employer must determine if the hourly worker is exempt from receiving overtime pay according to the FLSA.
To be considered exempt from overtime pay, the employee must pass specific tests set by the FLSA. These tests include being paid at least the minimum wage, and their job duties must mainly involve executive, administrative, or professional tasks.
It is important for employers to follow the rules and regulations to avoid legal issues and fines when changing an hourly employee to a salaried one. 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 important 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: Make sure you understand the labor regulations regarding overtime pay, breaks, and rest periods before making any changes to an employee’s pay structure.
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, any adjustments to benefits or vacation time, and other relevant information.
5. Monitor the impact: Keep track of 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. This type of change is not ideal and should only be done as a last resort. It’s also important 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 who is transitioning from a salary to an hourly position, start by finding out their current hourly wage and salary. Consider the employee’s duties, qualifications, and experience, as well as any 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. Don’t forget to account for benefits like health insurance, retirement plans, and vacation time. If the employee will be losing benefits by switching to hourly, they may need a raise in pay per hour to compensate.
Make sure the employee is correctly classified as exempt or non-exempt, and review your company’s policies on overtime pay. Exempt employees do not qualify for overtime pay if they work more than 40 hours in a week, while non-exempt 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 benefits like health insurance and vacation pay. If you’re on a tight budget, hiring hourly workers may be a more affordable choice.
4. Management style: If you want to offer your employees flexibility in their work schedules, hiring them on an hourly basis may be a better fit. Salaried workers are usually required to work a set number of hours each week and follow stricter time and attendance policies.
Considering 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?
The main factor in determining how an employee should be paid is whether they are exempt or nonexempt. Nonexempt employees are usually paid hourly, while exempt employees are typically paid a salary. However, employers may want to consider paying a salaried employee hourly if their workload fluctuates. Conversely, if an employee consistently works over 40 hours a week, it might be more cost-effective to pay them a salary.
When hiring employees, it is important for employers to clearly outline the tasks and responsibilities of the job. For instance, a sales representative may have to attend client meetings, give presentations, and take orders. An accountant’s duties might 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 for the job. 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 role and perform their duties effectively.
Are there any relevant state laws to consider?
Even if employees are considered exempt from federal labor laws, they may still be classified as nonexempt under state laws. It’s important 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. Different states have specific rules, licenses, and restrictions that need to be followed for certain professions or activities. For instance, regulations for medical professionals like doctors and nurses can vary greatly from state to state. Similarly, licensing requirements for restaurants and laws regarding food storage and preparation may differ across states. Employment laws, tax laws, and environmental regulations can also vary from state to state. To ensure compliance with the law, it is essential to understand these regulations. Consulting with a lawyer or industry professional can help in better understanding and adhering to state laws.
What is the current trend in the job market?
In 2021, 55.8% of workers were paid hourly, up slightly from the previous year. However, this is lower than in past years, when over 58% of workers were paid hourly. 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 led to increased demand for jobs in the healthcare, technology, and e-commerce industries due to the rise in healthcare needs, digital products, and online shopping.
Conclusion:
In conclusion, when deciding between offering salary or hourly pay in your business, it is important to consider the specific needs and goals of your company. 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.