What are the differences of paying an employee salary versus hourly, you ask?If you’re getting ready to hire your first employee, congratulations! – that means business is going well. While this is an exciting time, you’re probably realizing that being an employer brings a whole set of payroll questions – one of the first being whether you should pay employees a salary or hourly wages.
There are pros and cons to paying employees a salary, as well as to paying hourly wages. But you can’t simply choose to pay an employee a certain way based on what works best for your business. You must adhere to the federal government’s Fair Labor Standards Act (FLSA) that requires employees to be classified as exempt, which means you pay them a salary, or non-exempt, which means you pay them hourly wages.
Salary versus Hourly: Exempt Salary Employees
Exempt employees that make a salary must make at least $23,600 per year ($455 per week). Salaried employees are not paid overtime and are not protected under much of the FLSA rules that non-exempt, hourly employees are.
To be exempt and make a salary an employee must perform exempt job duties, which are defined as office or non-manual work related to management or general business operations of the employer or the employer’s customer. The job duties of someone being paid by salary will also require independent judgment.
In general, experienced, professional employees are paid a salary. These are managers, supervisors and sales staff, to name a few. Basically, these employees work to get a job done – however many hours that takes – and receive a set yearly salary for performing the duties of that job.
There are pros and cons to having employees that are paid a salary. The pros are that there are never any overtime pay calculations – salary is straight pay that looks the same on all paychecks. This can reduce time and expenses in figuring out payroll. The downside to hiring employees that get a salary is that this type of employee usually expects benefits.
Salary versus Hourly: Non-Exempt Hourly Employees
Non-exempt employees are paid hourly and must be paid the minimum wage or above. 2011’s federal minimum wage is $7.25 per hour. However, your state may have a different minimum wage requirement. You need to follow whichever is higher. As well as paying non-exempt employees minimum wage, you need to pay them overtime pay if they work more than 40 hours a week at 1.5 times their hourly pay rate.
Hiring hourly employees versus salary employees means that you need to keep track of hours and be sure to get their pay right. It means that payroll is a little tougher, as it can fluctuate from paycheck to paycheck. Additionally, unlike those making a salary, hourly employees get paid for all of the time they spend on a project – which means that when you have big projects or tight deadlines or need more time from them – you could end up paying hourly employees much more than salary employees. The good news is that benefits are not always expected by hourly employees, especially if they work less than 30 hours a week.
Whichever types of employees you hire, be sure to categorize them correctly, paying a salary or hourly rate based on the rules of the FLSA. And realize that some industries are not covered under FLSA, such as movie theater and agricultural workers, and some types of workers are governed under a different set of rules, such as railroad workers and many truck drivers.
Salary Versus Hourly Less of an Option
As you can see our original question is less of an option and more so driven by payroll regulations. Spend some time looking at the employee’s role, required hours worked, compensation and function in your company and the answer to salary versus hourly should follow.