Business owners and HR managers often struggle with the choice of whether to pay an employee hourly or on salary. Though some business structures make this decision unnecessary due to industry standards or federal regulations, there are still many industries where owners are able to make their own choice. When deciding whether you should pay hourly vs salary, you need to weigh all the benefits of each for both your employees and for you the business owner. But first, you need to understand what the difference between the two and what some of the benefits are.
The Difference Between Exempt vs Non-exempt Employee
If you are relatively new to the world of business ownership or HR, you may be unaware of the differences between an exempt and non-exempt employee and how this relates to hourly vs salary. Here are a few key differences.
Hourly vs Salary
Exempt employees are those who are paid a yearly salary regardless of the number of hours they work. They are referred to as ‘exempt’ because The overtime laws do not apply to them. Though some employers opt to give salaried workers bonuses or other perks for working more than the traditional 40-hour workweek, they are not required to by law.
Non-exempt employees, on the other hand, are paid based on the number of hours they work. Federal regulations require that they are paid at least minimum wage and that if their work week exceeds 40 hours, they must be paid overtime. Overtime rate is determined by state law and is generally 1.5 times the normal rate of pay.
Professional vs Labor
Whether an employee is paid hourly or on salary is often determined by the type of work they do. Those in ‘white collar’ jobs of management, supervisors, and other professional designations are salaried while ‘blue collar’ laborers are paid an hourly rate.
This can often mean that a workforce is made up of a mix of salaried and hourly employees. In a construction business, for example, the HR team and foremen could be on salary while the laborers are paid hourly.
Benefits of Salary vs Hourly
Sometimes, the business owners have no choice whether they pay hourly or salary. However, if you do have a choice, you should be aware of the benefits and drawbacks of each system. Below are the benefits of having salaried vs hourly employees.
Timekeeping is Easier
Calculating salary vs hourly pay is relatively cut and dried. For hourly employees, you simply multiply the number of hours worked by the hourly rate of pay to find out their yearly wage. Add in any overtime hours worked. This can be compared to what you would pay the same employee on salary.
If you want to see what a salaried employee would look like if he or she was hourly, base calculations on the typical 2080-hour work year. Divide this by their salary to get an accurate hourly rate.
Though you need to track employee hours for both types of workers, hourly employees are the only ones you need to analyze regularly for payroll purposes. Unless you are providing extra perks for salaried employees who work more than 40 hours, you generally only need their information for record-keeping purposes.
Engagement is Stronger
Though there are some reasons an employee or employer would choose hourly overly salaried work, most long-term careers fall into the salaried category.
Why? Engagement tends to be stronger in those who are salaried because they see their position as more of a career. Hourly work tends to be temporary or occurs during the ‘stepping stone’ years. When an employee is salaried, you can provide them with more benefits and incentives to stay. They work longer hours not to qualify for overtime pay, but to finish a project and strengthen the company.
Budgets Are Easier to Set
Payroll accounts for a huge chunk of your monthly and yearly budgets. With salaried workers, you know exactly how much to budget for as they get paid the same every pay period. This only changes if you are giving bonuses or extra pay for overtime.
It can be difficult to pinpoint a budget for hourly workers, especially if they are consistently working overtime that you did not anticipate. You may need to put more policies in place for hourly workers to limit overtime hours and better track their schedules.
The benefits of salary vs hourly pay for your employees is an important topic to consider. It may affect your bottom line as well as employee morale and the ultimate success of your business. If you’re in a position where you can choose whether an employee is salary or hourly, make sure you take into consideration the above points. The right choice will always be the one that has the most benefits for the employee as well as your business.