There are a lot of decisions to make when hiring an employee. Offering an hourly or salaried position is one of the most important ones. 

Typically, a salaried employee will receive the same amount each pay period, while an hourly employee charges a specific rate for each hour worked. If they work eight hours a day at $30 an hour, you would pay $240 a day before taxes.

Each option has pluses and minuses. To make the best decision, you must know the laws governing each arrangement and all the other differences between the two options. 

Hourly employees: Details

Hourly employees are owed a higher than the usual rate if they work more than 40 hours a week. The exact amount depends on the state where you do business. The paychecks will differ depending on the hours worked. You determine the frequency at which you make payments.

Getting paid hourly can mean earning more, especially if you’re in a well-paying job with lots of overtime. It also allows for a clearer separation between work and personal life, giving you time for family, hobbies, or even another job once you’re off the clock.

Pluses

Hourly workers usually get paid extra for working overtime, which can mean earning more during busy periods. Some employers offer higher pay rates for holidays, giving hourly workers a chance to earn more than those on a fixed salary.

Also, hourly jobs allow workers to schedule time for other interests like education, skill-building, or even starting their own business.

You don’t have to pay for an hourly employee’s health insurance, retirement, and paid leave. This arrangement provides the flexibility to cover your business operations. This can be crucial during peak seasons or if salaried employees are temporarily unavailable.

Minuses

Being paid hourly also comes with risks. Hourly employees might be the first to feel the effects of legal changes or company struggles. Employers can cut their hours easier than eliminating salaried positions. However, if you’re part of a union, you might have some protection against these risks.

Overtime wages can be costly if your position requires a lot of overtime. It is time and a half in most states, meaning 1.5 times the employee’s regular hourly rate. If the worker’s hours are not consistent or you’re tracking time manually, tracking becomes difficult.

With hourly employees, recordkeeping is crucial. A possible solution in this case is making an hourly employee a salaried one. You can switch between hourly and salary payments using a simple hourly salary calculator.

Salaried employees: Details

A salaried employee receives an annual salary agreed on with the employer in advance. They work the standard 40 hours a week. They get the same income even if they work more or less than 40 hours in a certain week. Salaried workers do not receive overtime pay for this reason. You can have a weekly, monthly, or biweekly payment schedule.

Pluses

Salaried employees get a fixed paycheck, including sick days without pay deductions, reducing stress and providing financial stability. They also receive additional benefits like healthcare and paid vacation, enhancing overall financial security. Salaried roles offer more career advancement opportunities compared to hourly positions, making them beneficial in the long run.

Not owing overtime is a big plus for salaried workers. Their full-time commitment benefits businesses in busy times. Payments are easier to process because salaried employees always get the same amount. This alleviated payroll makes automating processes in your payroll system easier and means less work for your accountant. 

Minuses

Getting a salary means you get a fixed pay, but it has its downsides. You might have to meet goals or finish tasks, even if it means working longer hours or weekends without extra pay. This can blur the line between work and personal time, making it tough to balance both. It also adds stress to finish tasks, sometimes sacrificing your own free time.

Salaried employees do not clock in and out, which means they aren’t held accountable for coming in late or leaving early. This isn’t an issue all the time as these employees are usually on a high level and don’t abuse the flexibility of the arrangement. 

The manager should also consider the quality and amount of work achieved instead of only the number of hours employees are at the workplace. Salaried workers are often people who have proven their value to the company and are staff you want to have long-term.

Making the right decision: hourly or salary?

The main difference between the two options is that salaried workers receive an annual pay that is paid out consistently, while hourly employees only receive payment for time worked. Your decision depends on the type of work, the inclusion of benefits, and the applicable laws. 

The consistency of work 

If the work fluctuates, paying employees hourly is better. If there is often the need to work more than 40 hours a week, paying a salary would be more cost-efficient.

Benefits

Tracking a salaried worker’s benefits, such as health insurance, is much easier if you are offering hourly workers benefits as well, which you don’t have to do. This aspect may not be decisive, but it’s worth considering. 

The FLSA and relevant state laws 

You must pay workers who are categorized as nonexempt under the FLSA hourly. If this federal law exempts them, check if there are any state laws classifying them as nonexempt. In California, an employee must earn twice the minimum wage to be exempt, which is higher than the amount required by federal law.

FAQs

What is an Implicit Cost?

An implicit cost is a hidden expense that’s already been spent but not clearly shown as a separate cost. It represents the missed opportunity when a company uses its money for a project without getting paid back for the resources used. Implicit costs happen when you use something you already own instead of renting or buying it.

Why do some jobs pay by the hour while others offer a salary?

How people are paid depends mainly on their jobs and income levels. Workers usually need to work independently for over 50% of their time to qualify for a salary, according to the FLSA. For those earning minimum wage, they won’t earn enough for a salary until they start working overtime. Small businesses or those with inconsistent revenue often prefer hourly employees because they can control labor costs by limiting hours.

Final Words

There are upsides and downsides to being paid hourly versus having a salary. Salaried employees usually get more benefits like paid time off and retirement plans. Hourly workers typically don’t get paid leave and might need to manage their healthcare on their own. But hourly employees often have more freedom and might even get to choose their hours.