Determining how to pay employees can be difficult. Not only do you have to determine how much to pay employees, you also have to decide if you will give employees a salary or hourly wages.
Determining if your employees should be salary vs. hourly might take some deliberation. There are laws and different benefits of salary vs. hourly wages that you need to consider.
Laws: nonexempt vs. exempt
There are two FLSA employee classifications: nonexempt and exempt. Nonexempt employees are not exempt from FLSA overtime and minimum wage rules. So, you must pay your nonexempt employees overtime wages when they work overtime hours.
An employee is considered nonexempt unless they meet one of the following:
- Executive, administrative, or professional exemption
- Earns a salary,
- Makes at least $35,568 per year ($684 per week), AND
- Has high-level job responsibilities that qualify for exemption (i.e., executive, administrative, or professional duties)
- Computer exemption
- Receive a salary of at least $684 per week or a fee of at least $27.63 per hour,
- Work as a computer system analyst, computer programmer, software engineer, or something similar, AND
- Have primary duties that meet the FLSA’s computer exemption requirements
- Outside sales exemption
- Has a primary duty of making sales or obtaining orders or contracts AND
- Is regularly engaged away from the main business office
- Highly compensated employee exemption
- Receive annual compensation totaling $107,432 or more
- Perform at least one of the executive, administrative, or professional duties
Pros and cons of paying salary vs. hourly wages
Paying an employee a salary vs. hourly wages has both pros and cons.
If your business needs to cut back on spending, you could cut back the hours of your hourly workers. You will reduce payroll costs, however, your employees will lose valuable pay.
You pay hourly employees for all the hours they work. If you want an hourly employee to work more, you have to pay them more. And, if an employee works overtime hours, they will earn even more. You will have increased payroll costs if you need hourly employees to work more.
Also, hourly employees often have inconsistent work schedules. Unpredictable hours could cause unhappy employees. Of course, the work schedule will depend on your business. You might have hourly employees who work the same times every week or every day.
Salaried employees earn predictable wages. Their wages should be the same amount each pay period. Consistent earnings make personal budgeting easier for your salaried employees.
Additionally, many people associate a salary with having a more valuable position at your business. While a salary does not actually designate a greater job status, you might be able to make employees feel like they have more worth and prestige by giving them a salary.
If an exempt salaried employee works over 40 hours in a week, you do not have to pay them overtime wages. While this might sound great for your business’s budget, working more without more pay is not great for employees. If you regularly expect employees to work many extra hours, you should consider increasing their wages.
Also, if you give salaries to nonexempt employees, you need to still pay overtime wages when necessary. Paying hourly wages to nonexempt employees might be easier than figuring out how to calculate overtime for salary employees.
Typical salary vs. hourly employees
There are some typical industries and jobs that have salaried or hourly employees. Retail and restaurant staff normally receive hourly wages. Office professionals typically receive a salary.
You should think about your industry and employee tasks when you determine salaried employees vs. hourly employees.
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This article has been updated from its original publication date of January 11, 2016.This is not intended as legal advice; for more information, please click here.