Before hiring the right person for the job, you need to decide how you'll pay them. Two of the most common ways to pay employees is with a salary or an hourly wage.
You're probably wondering which option is better: the flexibility of an hourly employee or the stability of a salaried one. Of course, the answer is never as straightforward as we'd like.
Let's compare the pros and cons of hourly vs. salary workers, the different laws for each, and what to look for when determining the right fit for your business.
What is a salaried employee?
A salaried employee earns an annual wage regardless of when they clock in and out. In other words, whether you work 20 hours or 60 hours per week, the number on your paycheck stays the same.
To state the obvious, an employee isn't paid their entire salary on the first day. Instead, it's divided by the number of pay periods, often on a weekly, biweekly, or monthly basis. For example, an employee with a salary of $60,000 a year, paid twice a month, would receive $2,500 per paycheck.
Pros of Salaried Employees
Even if an employee clocks additional hours during the week, they receive the same rate per paycheck. Meaning, you don't need to compensate employees who go beyond the standard 40-hour workweek.
Another advantage of salaried employees is the predictability of payroll. Every salaried employee signs an employment contract outlining their base salary and frequency of payment. When it comes time for payroll, you know exactly how much to pay since there is no fluctuation from week to week.
Cons of Salaried Employees
Since salaried employees aren't clocking in and out each day, or filling out a timesheet each week, there's a possibility they'll work less than 40 hours during some weeks. That said, most salaried employees are critical players in their organization and strive to meet expectations.
What is an hourly employee?
Hourly employees account for a whopping 55.5% of all wage workers in the U.S.
Here's how it works – an hourly employee earns a certain rate per hour of work. This rate must match or exceed the minimum wage, which will vary depending on your state. If your state's minimum wage is different from the federal minimum wage, you're required to pay the higher of the two.
You can pay hourly employees at the same frequency as salaried employees, but their paychecks will fluctuate to reflect the number of hours they work per week. For example, let's say you're an hourly employee working at a rate of $10 per hour. You clock in 40 hours one week, which is $400 worth of work. The following week you only work 20 hours — earning a total of $200.
Pros of Hourly Employees
Unless covered in a contract, hourly employees aren't guaranteed a certain number of hours each week. This means you have the flexibility to set hours based on demand, securing coverage when you need it.
Also, you have no obligation to make an hourly worker a full-time employee. By hiring an hourly worker, you can offset the benefit costs for full-time employees, like healthcare and paid time off.
Cons of Hourly Employees
Arguably the biggest con of hourly employees can be boiled down to one word — overtime. If an hourly worker surpasses the 40-hour threshold, they are eligible for overtime, which accounts for one and a half times their regular pay. This becomes costly if the nature of the position requires more hours than the standard workweek.
Another con is tracking how many hours your employees work, which takes time and careful review. You can verify the hours with timecards, or invest in a time and attendance system. Either way, expect to spend some time crunching the numbers.
Exempt vs. Non-exempt Employees
Salaried and hourly employees have different laws and regulations, which can guide you to determine the best fit for your business.
Hourly employees have non-exempt status — therefore, if they work more than 40 hours a week, they must be compensated under the provisions of the Fair Labor Standards Act. Employers must abide by the law to avoid fines, fees, and even prosecution.
On the flip side, most salaried employees have exempt status. An exempt employee must earn a minimum of $455 per week, or $23,660 per year, in the form of a salary. And, if you haven't already guessed, exempt employees are exempt from overtime pay.
Let's consider this example to demonstrate the difference between exempt and non-exempt employees:
Elizabeth, an exempt employee, is working over the weekend to meet a Monday morning deadline. Despite working "off the clock," she's not compensated for these hours.
Meanwhile, Lucas, a non-exempt employee, picks up an extra shift at a retail store over the weekend. He could take the weekend off, but he knows he will get compensated for working overtime.
Determining the Right Fit for Your Business
Back to the question on everyone's mind: is it better to hire hourly or salaried workers? The answer depends on a variety of factors:
1. Relevant federal and state laws.
Familiarize yourself with relevant federal and state laws. Even if employees are exempt on a federal level, state laws may classify them as nonexempt.
2. The nature of the position.
Consider the type of work an employee will be doing. For example, if you anticipate an employee will need to work more than 40 hours per week, it could be more cost-efficient to pay them a salary.
3. Your business and its needs.
Does your business need flexibility or predictability? Do you have the resources to track hourly workers? Do you need to offset the costs of benefits for full-time employees? These questions, among others, can determine whether your workforce should be salaried or hourly.
As you prepare to expand your team, it's important to decide how to pay the new players. While you must abide by federal and state laws, there is still room to weigh your decision based on your business and its needs.