When you’re hiring a new team member, you have to make a lot of decisions. Does this person have the right skills and experience? Will they be a good cultural fit? Once you’ve decided yes to those, you’ve got yet another decision to make. Will they be paid salary vs. hourly?
This seemingly simple question can have big consequences on the time you spend on administrative duties and oversight. Before making the decision, you’ll want to pay close attention to legal requirements to avoid costly mistakes.
In this article, we’ll walk you through the differences between salaried and hourly employees, highlight the pros and cons of each, and point out the labor laws that apply.
Table Of Contents
Salary Vs. Hourly: Definitions And Differences
Before deciding whether your new team member should be salary vs. hourly, let’s first explain exactly what these are and how they differ.
Hourly workers get paid just as it sounds: by the hour. You’ll agree upon a rate of pay and then calculate the number of hours they worked during a pay period. If the number of hours worked is over 40 in a week, they’ll be entitled to overtime pay.
When employers hire hourly employees, they must abide by the Fair Labor Standards Act (FLSA) as to minimum wage, overtime pay, and several other requirements.
Salaried employees are different, as the hours they work are not taken into account when calculating payroll. Instead, they earn a fixed payment each pay period based on a 40-hour workweek regardless of the hours put in.
Different from hourly employees whose wages can fluctuate due to the number of hours worked, a salaried employee earns a consistent and predictable sum every pay period. They are generally not subject to the FLSA’s overtime pay and minimum wage requirements.
Salary: Pros And Cons
One advantage of putting new hires on salary is that it is less burdensome administratively. Because they’re paid a fixed rate per pay period, you can set up your payroll system to generate checks automatically.
Another advantage is that with salaried employees, even if they work more than 40 hours in a week, there is no overtime. This means payroll is more predictable and will not spike during busier periods.
Because salaried employees are not paid for the hours put in, it’s possible that they may not work the full 40 hours every week. They could take long lunches or coffee breaks, come in late, or leave early.
Being on salary means they have more personal flexibility during the day to manage their time. Before you get too worried, it’s important to note that salaried employees tend to be professionals who are less likely to take advantage of the business arrangement.
Hourly: Pros And Cons
The pros of paying hourly wages are first in the flexibility of this arrangement. If your business has busy seasons and slower seasons, such as within the retail industry, paying employees hourly allows you to scale up and down as needed.
Hiring several employees that can come in and out as required by the business can be a good, flexible option, but you have to be careful when shift planning that everyone’s needs are met, or else it may not be sustainable.
The first disadvantage of paying employees on an hourly basis is the administrative duties associated with this pay structure. You’ll have to validate their hours weekly, which means you’re going to need a good time and attendance management system.
If you’re accounting for time and attendance manually, it can get quite tricky because mistakes are common. The good news is that with employee timesheet software like Inch, which can be used to track and compile hours and send them to payroll, it’s a bit easier to manage.
Another con when paying your employees on an hourly basis is that they are entitled to overtime pay when they exceed 40 hours in a week. Although overtime rules are state-specific, generally it is calculated as “time and a half,” which can be quite expensive for the employer.
This also means that although they are paid at regular periods, the amount can fluctuate due to the hours put in and whether there was overtime. This can be harder to manage from a budgetary perspective, as it’s harder to project employee costs.
Employees who are paid hourly also may need more flexibility in their schedules since the lack of certainty in hours may require them to seek additional employment. To ensure that all of your needs are met, you may have to hire more people as backups.
Labor Laws: Exempt Vs. Nonexempt Employees
Now that you know the benefits and drawbacks of salary vs. hourly, it’s time to talk about labor laws. The FLSA is a federal law that establishes minimum wage, overtime, employer recordkeeping, and youth employment requirements.
Under the FLSA employees are classified as “exempt” or “non-exempt.” If employees are exempt, you don’t need to abide by the FLSA’s requirements.
Job titles, descriptions, and payment of a salary rather than an hourly wage are not sufficient evidence that the exemption applies. Let’s take a look at the other considerations.
Exempt Employee Requirements
Although most workers are non-exempt, if you’re hiring for an executive, administrative, or professional position, your new employee may be considered exempt. The FLSA provides three tests that must be passed before making this determination.
The Salary Basis Test
To qualify as exempt, the employee must be paid a predetermined fixed salary that cannot be reduced due to work quality or hours.
The Salary Level Test
The employee must make a minimum specified salary depending upon the type of work performed. There are higher salary levels required for certain professionals as well as carve-outs for others.
As the rules are very specific, you should review the FLSA closely to see how this test applies to your situation.
The Duties Test
The Duties Test requires that the employee’s job consist primarily of executive, administrative, or professional duties. This test tries to distinguish between white-collar or non-manual work and blue-collar or manual work that would not be exempt from minimum wage or overtime.
While the FLSA provides these federal standards for exempt employees, you want to also look at your specific state law, as it may require higher standards.
Non-Exempt Employee Requirements
The FLSA requires that most employees are covered by minimum wage laws and are entitled to overtime pay for time worked over 40 hours a week. All employees who primarily do manual or blue-collar work are considered non-exempt.
If the employee works in an executive, administrative, or professional capacity but doesn’t pass the tests outlined above, they should also be considered non-exempt.
Occasionally, employers make the mistake of misclassifying employees. It’s important to realize that even if an employee is salaried, you might still be responsible for paying overtime and for meeting other FLSA requirements.
Employee misclassifications are quite expensive, both in time and money.
Salary Vs. Hourly: How To Decide
When deciding salary vs. hourly, first confirm an employee’s status as exempt or non-exempt based on the specifics of the job. Consider the job requirements, terms, salary, and duties. Carefully review the FLSA requirements and apply all of the tests.
To avoid any complications, you’ll also want to set up good workforce management controls and stay abreast of changes in wage and hour laws that might affect you — including all federal, state, and local laws.
The more you and your team are aware of the differences and the laws that apply, the easier it is to determine the right pay structure for your new hires.
Payroll Made Easy
Although deciding whether a new hire should be salary vs. hourly seems like a pretty straightforward decision, it can be quite complicated. We’ve looked at the differences between them, as well as the pros and the cons.
But, as we said, that’s hardly the end of the story. Labor laws have their own requirements as to exempt and non-exempt employees that look to their salary basis, level, and duties. Following the law is crucial to avoid future headaches.
Once you have your employees all set up with the right payment structure, you’ll need to manage it. That’s where we come in.
With Inch, it’s easy to keep track of time, attendance, and overtime. Our software can also give you insight into productivity so you can better train and track performance.
Inch can help relieve you of cumbersome administrative work, allowing you to focus more attention on growing your business.