Salary vs. Hourly Pay – What is the difference?

Life is full of experiences and expectations. And with the economic growth over the past few years, employees’ expectations of higher pay and richer benefits has risen even further. The amount of money and how you are paying your employees(salary vs. hourly) is essential to get right. If your employees do not feel like they are getting correctly paid, they will look elsewhere for opportunities. 

Therefore, take a moment and think about how(salary vs. hourly) and how much you are paying your employees. Today, an organization like yours is typically paying their employees either on an hourly or salary basis. Both types of pay have their own advantages and disadvantages. It is essential to understand which is better for you and the success of your organization.

This article will talk about everything you should know before hiring an employee on a salaried or hourly basis.

Though there is a significant difference between the two payment methods, salary vs hourly. you can’t say that one is better than the other. You need to determine what fits you well on the basis of the position being filled by the hired person.  There are many advantages and disadvantages of hourly and salary payment methods that you need to look at and check prior to making the decision.

Understanding the Differences: Salary vs. Hourly

Salaried employees are paid a fixed amount that you pay to your employees regardless of the hours that they have worked. For example, to a salaried job employee, you need to pay a fixed amount every month; in the contract, you can indicate it as an annual amount, like $60,000 per annum, which will be  $5,000 per month. In contrast, hourly pay means you pay a person a specific amount based on the number of hours he/she has worked, like $20 per hour. So, if the person has worked for 5 hours in a week, you need to pay him $100 for that particular week. An hourly employee can be paid weekly, biweekly, or monthly.

However, hourly employees must be paid at least the federal minimum wage. They are also entitled to overtime pay. Therefore, even though salary and hourly payment methods are pretty straightforward, there are exemptions and non-exemptions that one can get based on the federal labor law. But before understanding exemptions and non-exemptions, we first need to understand what is a salaried and hourly employee.

What Is a Salaried Employee?

An employee who gets paid regularly on the basis of a predetermined amount; the pay period as mentioned earlier can be weekly, biweekly or monthly. Even though the salary package varies from position to position and company to company, it can come with benefits like fixed annual pay, paid time off, etc. As the number of working hours is fixed, it is very uncommon for a salaried employee to receive overtime pay. And if a salaried employee is entitled to receive overtime pay, it will be mentioned in his/her employment contract.    

For salaried employees, assigned tasks need to be completed—even if they need to work for more hours and on weekends.

What Is an Hourly Employee?

Unlike salaried employees, hourly employees are paid on the basis of the hours that they work. Hourly employees need to be paid on the basis of federal minimum wage as per their country or state. There are states which have higher minimum wage rates. And hourly employees should be paid one and a half for all hours that they have worked over 40 hours in a particular week as per the Fair Labor Standards Act (FLSA).  

This means if an employee has an hourly rate of $10 and works for 70 hours in a week, then his/her payment would be 40 x $10 for the regular 40 hours and 30 x $15 for the overtime of 30 hours.

What Is the Fair Labor Standards Act?

As per the Fair Labor Standards Act, every non-exempt employee should be paid the minimum wage as per his/her state. The minimum wage rate is the lowest possible hourly pay that needs to be paid to employees by the employer. It is also recognized as a “pay floor.”

The minimum wage is determined by the FLSA for employees in the private and public sectors. All hourly employees are regarded as non-exempt employees under the Fair Labor Standards Act guidelines. Which means they are not exempt from overtime pay.

What Is an Exempt Employee?

As per the Fair Labor Standards Act, exempt employees are not entitled to the overtime and/or minimum wage provisions of the FLSA. This means that employees will not get paid for the hours when they surpass their regular 40 work hours. For example, an employee works for 70 hours, he/she will still be just paid for 40 hours. Exempt employees are also not entitled to minimum wage laws.

To fall into the category of an exempt employee, the company must pay the employee more than minimum wage. As of January 1, 2020, FLSA made it compulsory that employees working in an exempt position be paid a minimum of $35,568 per year, or $684 per week. 

What Is a Non-exempt Employee?

In contrast to an exempt employee, a non-exempt employee is the one who is eligible for overtime and minimum wage provisions. A non-exempt employee gets overtime pay once he/she exceeds the 40-hour workweek.

Also, as of January 1, 2020, salaried employees should be categorized as non-exempt if they earn less than $35,568 per year or $684 per week. A salaried employee will also be considered non-exempt if they don’t meet that particular state’s Department of Labor’s standards for classification as exempt.

However, whether you have a salaried or hourly employee, you need to figure out how much money your employees will receive in each paycheck to understand how the two rates compare. Then, you will be able to determine whether you should hire a person on a salary or hourly basis.

So, How Should You Calculate Pay for Salary vs. Hourly Employee?

For a salaried person, the salary is predefined when the person is hired. If you offer your employee an annual salary of $60,000, he/she will receive $60,000 by the end of the year or $5,000 monthly.  A salaried position does not offer overtime pay; however, it includes possible bonuses and health insurance based on the designation and company.

Now, for an hourly employee, you will have to take a look at the hourly rate and minimum wage policy of your state. Once you have the understanding and knowledge, you can determine how much you will have to pay to the hourly employee.  

For example, if you pay a person an hourly rate of $15 per hour, and he/she works 40 hours a week for 70 weeks a year, in total, you will have to pay the person $42,000 in a year. In addition to this, you will also have to consider the overtime hours you expect an hourly employee would do. As discussed before, as per the federal labor law, if an employee works any hour above 40 work hours in a workweek, he/she should be paid at one-and-a-half times the regular hourly rate. This means if the person makes $15 per hour, his/her overtime rate would be $22.50 per hour.

After this, you should consider the advantages and disadvantages of salary vs. hourly pay.

Advantages and Disadvantages of Salary vs. Hourly Employee

The advantages and disadvantages of paying someone based on an hour or predefined salary involve the hours worked, overall company profits, etc. People may prefer salaried over hourly because of the flexibility, fixed income, and benefits. However, others may worry about adverse effects like the likelihood of overworking without getting the overtime pay.

Therefore, it is essential to know the pros and cons of salary vs. hourly pay.

Benefits of a Salary 

Fixed and Constant Salary

The main advantage of a salaried position is that there will be a regular salary that you will have to pay your employees at least for a predefined period of time. Therefore, you will know how much you need to spend per employee against what you are earning in that year. This means you can easily do your budgeting.

Guaranteed Profits

The extra benefits that salaried employees will receive will be decided when they join. These benefits include health insurance, pension, paid time off, etc. There are other perks also like fitness benefits, childcare, travel reimbursements as per the position and company.

Drawbacks of a Salary

No Overtime Pay

There are sporadic chances that a salaried employee will be entitled to receive overtime pay for overtime that he/she did to complete the work. Salaried employees will have to work overtime if their work is not completed and is due. Salaried employee needs to complete their tasks no matter how much time it takes.

This gets very problematic for employees in companies with a culture of giving and working extra hours to prove to everyone that you’re working hard.

Possibility of Pay Cuts

In times of the financial crisis, the company can decide to do a pay cut for salaried employees as there are no set policies for that. This further leads to disappointed employees, less productivity, and some employees working more than they should without receiving any benefits.

Benefits of an Hourly Pay

Pay for Overtime and Holiday

Hourly pay employees will be paid extra for the time they work after 40 work hours. This means if an employee works for 46 hours, he/she will be paid extra for the 6 hours. In the same way, salaried employees will not be required to work on the holiday; however, if an hourly pay employee works on a holiday, he/she will be paid for that time.

Faster Payments

The other important aspect is how and when the salary vs. hourly pay employees get paid. An hourly employee will receive payment faster as and when he/she completes the tasks, whereas a salaried employee will have to wait till the end of the month to get paid.

Work Flexibility

Work flexibility is one of the biggest reasons why a person chooses hourly pay over salary. Students who are still in college but want to earn money to support their livelihood will choose hourly pay jobs as it will give them the flexibility to work when they can.

Drawbacks of Hourly Pay

Lack of Extra Benefits

Hourly pay employees don’t have the same type of benefits as a salaried employee, such as health benefits, paid time off, etc.

Constant Job Hunting

There is typically more juggling of jobs involved. Hourly pay employees jump from job to job on the basis of how they are getting paid. This can get exhausting both for the company and the employees.

Lack of Consistency

Financial stability is crucial for personal planning. Even if a person is working with a good company with a well-paid hourly pay position, there will always be a lack of stability and reliability. When a person does not work, he/she will not be paid anything.

To conclude, both types of payments have pros and cons associated with them. Now when you know each of them correctly and how they differ, you’ll be able to decide which one suits your needs better.

 

Surbhi Bharati
ABOUT THE AUTHOR
Surbhi Bharati
Surbhi is Content Marketing Manager at Replicon. She is a learner with a curiosity for new technologies. Replicon provides award-winning products that make it easy to manage your workforce. With complete solution sets for client billing, project costing, and time and attendance management, Replicon enables the capture, administration, and optimization of your most underutilized and important asset: time.
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