Two of the most common ways to pay employees is with a salary or an hourly wage. But what exactly is the difference between these forms of compensation? For one, salary employees often don’t qualify for overtime benefits or have to be paid the minimum wage. In contrast, hourly employees are paid the federal minimum wage, or more, and are entitled to overtime benefits.
It’s vital that you understand these differences to ensure your employees receive accurate pay stubs, and that you comply with federal and state laws. In this guide, we’ll go over salary vs. hourly employees in detail, to ensure you know how each type of wage works. Read from beginning to end, or use the links below to quickly find what you’re looking for.
- What is a salaried employee?
- What is an hourly employee?
- Pros and cons of salaried pay
- Pros and cons of hourly pay
- Overtime pay
- Employee time tracking with QuickBooks Time
What is a salaried employee?
A salaried employee is an employee that earns fixed wages, paycheck after paycheck, regardless of hours worked. According to the Fair Labor Standards Act (FLSA), salaried employees are typically exempt, so they’re not entitled to overtime wages. To qualify for a salary or exempt position, employees must meet the exemption requirements outlined by the U.S. Department of Labor Wage and Hour Division:
- Earn a minimum of $684 per week or $35,568 annually
- Work in an executive, administrative, professional, outside sales, or computer-related position
- Have decision-making authority, such as the ability to hire and fire workers
Make sure salary employees are meeting the requirements above to remain compliant with federal laws. Misclassifying employees, whether on purpose or by accident, can lead to an array of issues, such as lawsuits, fines, and even jail time.
If you’re a small business owner and are considering paying yourself a salary, take a look at our salary vs. owner’s draw post.
What is an hourly employee?
The FLSA hourly pay definition states that employees must be paid at least the federal minimum wage for the hours they work. Currently, the minimum wage rate in the U.S. is $7.25 per hour. However, the amount you have to pay employees may be higher, as some states and counties have different employment laws.
Hourly employees are typically nonexempt and are entitled to overtime wages if they exceed 40 hours in a workweek. This overtime should be paid at one and one-half times their hourly rate. For example, if an employee earns the federal minimum wage and works 41 hours, they’ll receive $10.87 for the extra hour worked.
Pros and cons of salaried pay
Salaried workers can enjoy many benefits, such as regular paychecks and employee perks that increase their overall enjoyment at work, productivity, and performance. However, there are also a few drawbacks that you should consider before offering employees a salary at your business.
Pros of salaried pay
- Fixed income means steady paychecks. The way salary pay works ensures employees receive a consistent paycheck according to the payroll schedule. This brings a sense of peace to many workers, as they don’t have to guess how much they’ll receive every pay period.
- Can offer more flexible hours. Salary employees are paid the same amount on a regular basis, so they can take a step back from work and return when they’re ready. This flexibility allows employees to work when they’re in the right headspace, increasing productivity.
- Better benefits packages. Oftentimes, salary employees will receive better compensation and benefits than their hourly counterparts. This means more bonuses, paid time off, comprehensive retirement plans, and health care coverage.
- Payroll is easier to process. The pay salary employees receive remains constant despite working longer hours, so employers don’t have to calculate complex overtime. Refer to our guide to payroll services if you need assistance with the payroll process for salary employees.
Cons of salaried pay
- Not eligible for overtime pay. Salary employees are not eligible for overtime pay even if they work more than 40 hours. The only way around this is if the employee doesn’t meet all of the exempt job duties.
- May have to work outside of normal hours. If there are major projects due soon, salary employees may feel the need to work late nights and weekends. Salary employees can push themselves to work more to stand out.
- Lack of work-life balance. Salary employees may have to make themselves available whenever an important call, text, or email comes in, despite not being on the clock. This can be stressful and may eventually lead to burnout and more stress.
Pros and cons of hourly pay
With hourly employees representing 55.5% of all wage and salary workers, the majority of your workforce will be paid by the hour. So, it’s important to know the advantages and disadvantages of paying your employees hourly wages.
Pros of hourly pay
- Eligible for overtime pay. Since hourly employees can receive overtime wages, they can significantly increase their gross pay and take-home pay.
- Better work-life balance. Hourly employees can balance their work and personal time better because they don’t have to work after hours. They can leave their work behind once they clock out for the day.
- Fewer responsibilities. Salary employees often have more obligations than those that are paid hourly. Hourly employees may only have to worry about performing their job duties and not overseeing other workers.
Cons of hourly pay
- No guaranteed salary. The hourly income employees receive depends on how many hours they work. Because they don’t receive fixed paychecks, hourly workers must be vigilant about unpaid time off to avoid reducing their income.
- Hours can change. Employees may not have a constant work schedule, depending on the industry they work in. Whereas one week they may work 40 hours, the following week they may be working 35. If the company they’re working for is experiencing financial hardship, their hours may also be cut.
- Overtime must be approved. Many employers have to approve overtime before employees can work additional hours. Overtime may only be eligible at the request of the employer, making it difficult to earn extra income.
- Less flexibility. Hourly positions may be unpredictable, offering little flexibility. This makes it challenging for employees to find time for doctor’s appointments or parent-teacher conferences, for example. Some hourly workers also don’t receive paid time off, so they may be reluctant to call off when they’re sick.
Exempt and nonexempt employees
Knowing the difference between exempt and nonexempt employees is vital. After all, miscategorizing employees can lead to underpaying workers. It’s also against the law, according to the FLSA. To help you remain compliant, we’ve outlined the most important things to remember about exempt and nonexempt employees.
One of the biggest differences between exempt and nonexempt employees is that the FLSA doesn’t cover exempt workers. This means that they’re not eligible for overtime benefits and don’t have to receive the minimum wage.
Most employees that are classified as exempt will typically work in white-collar or upper-level positions. This includes doctors, teachers, and software engineers. However, having these job titles doesn’t automatically make employees exempt. In addition to holding a qualified job role, employees must also meet certain criteria.
Nonexempt employees are entitled to overtime wages if they work more than 40 hours in a workweek. Generally, nonexempt employees work in blue-collar or manual-labor positions, including cashiers, first responders, and construction workers. Most of the time, these types of employees will be paid by the hour, but they can also receive a salary.
Looking for additional information on exempt and nonexempt employees? Head over to our exempt vs. nonexempt guide to learn how to classify your workers correctly.
The FLSA requires that employers provide overtime compensation to nonexempt employees who work more than 40 hours a week. This is a federal labor law that you must abide by if you wish to avoid fines, fees, and possible prosecution. In addition to this, some states have their own wage laws that you’re also obligated to follow.
For example, overtime laws in Nevada require employers to pay overtime wages to employees that work more than eight hours a day. Take a look at our complete guide on overtime pay laws by state to learn what overtime rules apply to your workforce.
As mentioned earlier, overtime wages are to be paid at time and a half an employee’s regular rate of pay. The pay rate depends on whether you’re following the federal or your state’s minimum wage policies or paying employees beyond that. Moreover, you can provide overtime benefits at a rate higher than time and a half if you choose.
Overtime pay can be expensive for any business. This is especially true if you don’t have a proper way of tracking hours and employees constantly work past the end of their shift. To prevent costly overtime, use a time-tracking software such as QuickBooks Time to receive notifications when employees don’t clock in or out as scheduled.
For a more in-depth look at overtime policies, refer to our article on how overtime works.
Employee time tracking with QuickBooks Time
It’s important to recognize the differences between each type of wage when hiring. Remember, salary employees are often exempt from receiving overtime compensation and don’t have to be paid the federal minimum wage, while hourly employees do. When considering whether to have salary or hourly employees, keep the benefits and advantages mentioned in this article in mind.
Ensure both types of workers are paid correctly by using a robust employee tracking system like QuickBooks Time. This time-tracking software makes it simple to track billable hours, create employee schedules, and monitor on-the-go employees with GPS tracking features. Plus, it seamlessly connects with your preferred accounting or payroll software to make calculating paychecks a breeze.
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