Salary Vs. Hourly: Differences, Pros, And Cons

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
• Salary: Pros And Cons
• Hourly: Pros And Cons
• Labor Laws: Exempt Vs. Non-Exempt
• Salary Vs. Hourly: How To Decide

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 Employees

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

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.

Businesses normally set an employee’s annual salary on 2,080 work hours — representing 40 hours for 52 weeks a year. The agreed-upon salary will be paid pro-rata based on the pay period.

For instance, if an employee is paid weekly, you can calculate the amount due by dividing the annual rate by 52 weeks.

Keep in mind, even if they don’t work the full 2,080 hours in a year, a salaried employee will be due the entire amount agreed upon.

Salary: Pros And Cons

There are several pros and cons to consider before deciding that offering a salary is the right choice for a position. Let’s start with the pros.

Pros

Easy Admin

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.

This means you can save the time and money associated with double and triple-checking schedules to determine when exactly the employee was on and off the clock.

No Overtime

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.

High-Quality Hires

Yet another benefit of offering a salary has to do with hiring. Often, with salaried positions, it is easier to attract high-quality employees. This is because many professionals prefer the stability of regular hours and pay, not to mention the benefits that often come along with these positions.

Cons

Now, let’s take a look at the cons.

Higher Cost

The first con to hiring a salaried employee is cost. Salaried employees must earn a weekly salary of $684 or greater if they’re going to be exempt from FLSA, more than the minimum wage for hourly employees federally, and in most states.

Not only that, but salaried employees often expect benefits. Benefits could be things like extra vacation time, a severance agreement, a gym membership, student loan assistance, or relocation benefits.

Here are a few other benefits that are commonly offered to salaried employees.

• Paid time off
• Paid sick leave
• Family leave
• Bonuses
• 401k
• Company car
• Childcare
• Educational allowances
• Computer equipment
• Telephone and bill coverage
• Life insurance
• Mental health coverage
• Dental coverage
• Vision coverage
• Investment opportunities

As you can imagine, the cost of benefits can add up, making your salaried employees considerably more expensive than their hourly counterparts.

Of course, you don’t have to provide these benefits, but doing so does make your offer stand out in a competitive job environment.

Productivity And Time Management Concerns

In addition to the higher cost, 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.

That’s because 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.

If they do take an extra break, they’ll probably offset it with more work later in the day or week.

Incentivization Issues

Another con when it comes to salaried employees is that they may not feel incentivized to overperform on a task or project, as there is no consequence on their salary whether they go above and beyond or not.

On top of that, when an employee’s pay is the same regardless of results, it can be difficult to suitably reward them for their effect on the company’s bottom line outside of yearly bonuses.

Difficult Performance Review

In addition, when it comes to performance reviews, it can be harder to get a clear picture of a salaried employee’s effectiveness. This is because you don’t know the amount of hours put into a task, making it impossible to accurately measure their efficiency.

No Payment Flexibility

Lastly, with salaried employees, remember that their salary represents a fixed cost to your business. This means it’s harder to make adjustments if there is a dip in the business without renegotiating their employment contract or letting an employee go.

Hourly: Pros And Cons

As with salaries, hourly wages have both pros and cons. Let’s walk through some of the most important considerations when deciding which to choose.

Pros

More Flexibility

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.

Hiring several employees who can come in and out as required by the business can be a good, flexible option. This way, you can control your labor costs and only pay for what you need.

But, keep in mind that you have to be careful when shift planning that everyone’s needs are met, or else it may not be sustainable.

Easy Incentivization

Speaking of shift planning, if there are hours in the schedule that are harder to cover, you can easily incentivize hourly employees with a bump in pay for less desirable shifts when needed.

Less Expensive

Another advantage to hiring hourly employees is that they can be less expensive. First, they’re subject to minimum wage — a figure less than the minimum payment due to a salaried employee. On top of that, they’re usually not eligible for benefits.

Easy Performance Measures

Another thing to keep in mind is that with hourly employees, you can see their contribution easily as hours are strictly tracked. All you have to do is compare the output to the specific amount of time worked.

If you do decide to go hourly, Inch’s time clock software can make keeping track of hours a snap.

Cons

More Administrative Duties

Of course, there are also some cons to offering an hourly wage. The first disadvantage 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.

Overtime Charges

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, on a federal basis, overtime is calculated as “time and a half,” which can be quite expensive for the employer. State rules could kick it up even higher.

This means you’ll have to be acutely aware of how many hours your employee has worked in a given week before asking if they can stay late or pick up a shift.

Harder To Manage Budget

Paying an employee hourly 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.

Less Consistency

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.

However, the more backups you hire, the less consistency you can offer in terms of hours, as you’ll be trying to balance business needs with all of your employees’ hour requirements and limitations on available time.

More Staff Turnover

Additionally, if employees don’t have enough hours, you run the risk that they may quit. High staff turnover can be very expensive in recruiting and rehiring costs not to mention taxing on everyone’s time.

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. That means you needn’t worry about paying overtime or diligently tracking weekly hours.

But you can’t just assume an employee is exempt just because you pay them a fixed weekly sum. In fact, federal law assumes that everyone is eligible for overtime unless meeting exemption requirements.

According to FLSA, 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. This must be paid regularly — for instance monthly, bi-weekly, or weekly.

When it comes to base pay, there are permissible and impermissible reductions in salary as outlined in the FLSA. You have to be careful not to reduce an employee’s salary in a way classed as impermissible or you may be responsible for overtime.

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.

In general, to be exempt, an employee must be paid at least $684 per week, which can be extrapolated to their pay schedule. This amount must be “exclusive of board, lodging, or other facilities.”

That means if you’re providing housing for your employees — something that is common in hospitality for example — that cannot be considered part of their salary for purposes of the salary basis test.

In addition, other types of compensation are not considered salary under the test, including commissions, bonuses, stipends, benefit reimbursements, health plans, or retirement contributions.

It’s best to 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.

Federal law states the following requirements to pass the duties test. In addition to adhering to the Salary Basis Test, the Duties Test sets out specific requirements per professional role. Here are some of the guidelines for the test, so that you can get a better idea of how it applies:

For executives, additional requirements include the following:

• The employee’s primary work is managing the business at large or a department or subdivision of the business
• The employee oversees at least two or more full-time employees or their equivalent
• The employee has the power to unilaterally hire or fire, or their input as to these decisions is an important consideration

For administrative workers, the test also requires:

• The employee’s primary duty is to perform office or non-manual work related to the company’s general operations or management
• The employee’s primary duties require exercising their own judgment as to prioritizing work

To qualify for the professional exemption, employees must:

• Perform work that is intellectual in nature, requiring advanced knowledge in a field of science or learning by way of specialized instruction
• Exercise independent judgment

To qualify for the computer employee exemption, employees must:

• Either be paid on a salary or fee basis, no less than $684 per week or if hourly, not less than $27.63 per hour
• The employee must be hired as a computer systems analyst, programmer, software engineer, or other similar position
• The employee’s primary duty must be:
  • Applying systems analysis techniques and procedures to determine the functional specifications of the computer system, hardware, or software
  • Designing, developing, documenting, analyzing, creating, testing, or modifying computer systems or programs based on system design specifications
  • Designing, documenting, testing, creating, or modifying computer programs related to machine operating systems
  • Any combination of the above requiring the same skillset

To qualify for the outside sales employees exemption, the test requires:

• The employee’s primary duty is making sales or procuring orders or contracts for services or use of facilities to be paid by the customer.
• The employee must be typically off-site soliciting new business

In addition, highly compensated employees, or those performing office work and paid $107,432 per year or more are exempt from FLSA if they typically perform at least one of the duties of an exempt executive, administrative, or professional employee as set forth above.

Note that these standards can change, so it’s always best to consult the Department of Labor for any updates.

Also, as we mentioned, while the FLSA provides these federal standards for exempt employees, you want to 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.

Furthermore, police, firefighters, paramedics, and other first responders are not considered 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.

Misclassifying Employees

Occasionally, when deciding if an employee is salary vs. hourly, 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.

If you’ve misclassed an employee and are forced to retroactively make good on past overtime, it may be hard to amass the records if you haven’t been closely tracking their hours.

Employee misclassifications are quite expensive, both in time and money.

Salary Vs. Hourly: How To Decide

When deciding if a particular job posting should be salary vs. hourly, you’ll need to 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. After confirming FLSA requirements, take a look at your state’s requirements to be sure you are applying any additional tests needed.

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.