Should You Pay Employees Hourly or a Salary?

If you currently employ W-2 workers in your small business, or you are looking to hire top talent in the future, you’ll likely be faced with the decision on whether to pay employees an hourly wage or to provide them with a salary.

Let’s explore what each compensation scenario actually means, along with the pros and cons involved.

How are Employees on Salary Treated?

An employee who earns a salary is paid based on an annual amount. So, if the employee earns $50,000 per year, he or she will be paid a portion of this salary each pay period throughout the year. This amount is generally based on a 2,080-hour year of work (calculated by multiplying 40 hours times 52 weeks).
As a result, employees on salary are not required to maintain a timesheet for each pay period or account for their working hours. This is because the employee is compensated based on an overall amount rather than an hourly amount. So, if the salaried employee works more or less than a typical workweek, the extra time or missed time is generally not factored into how much the employee earns.

In the majority of cases, salaried employees work on a full-time basis.

How are Hourly Employees Treated?

Hourly employees are compensated based on a specific hourly amount, such as $15 per hour. These individuals are only paid for the hours they actually work, which is why they are often given a set work schedule each week to ensure they fulfill their duties. This is unlike salaried workers who, in some situations, can come and go from their jobs as they wish, as long as they are completing their work each day.

Since employers determine the work schedule of hourly employees, these workers are required to track their time on the job through either a time sheet or some type of time clock.

Employees who perform at least 30 hours of work each week are considered full-time, while those who work fewer hours than this amount are considered part-time. Part-time employees may receive different pay rates, benefit options, and paid vacation time than their full-time cohorts.

What are Exempt vs. Non-Exempt Employees?

If you’ve ever heard the terms exempt and non-exempt in the business world, you’ve probably wondered what exactly some workers are exempt from and what others are not exempt from. The answer to this question is overtime.

Exempt employees, which often include managers and supervisors on salary, are exempt from receiving overtime compensation in most cases. Non-exempt employees, which are generally classified as hourly, are not exempt from overtime pay and thus are eligible for time-and-a-half based on hours worked that exceed 40 within a workweek in certain circumstances.

Changing Overtime Rules?

As we discussed in this article, overtime laws may be changing in the coming months. A federal law was set to take effect on December 1, 2016, but it was blocked by a federal judge and is currently in limbo.

As of this writing, the current rules on overtime pay allow for salaried employees earning $23,660 or less each year to receive time-and-a-half compensation. However, if and when the new law is enacted, those earning less than $47,476 would be eligible for overtime. Statistics show that this would make about 4.2 million American workers eligible for the additional pay for extra hours worked.

Making the Decision

Now that you have a better understanding of hourly vs. salaried employees, it’s ultimately up to you to make the best decision for the team members in your small business. Remember that there is certainly more recordkeeping involved in managing hourly workers compared to those on salary, but it is also easier to track hourly employees’ work and progress as well.