Salary Vs. Hourly What’s Better for Your Business

Sections of this topic

    In business, one of the pivotal decisions pertains to employee compensation. Two primary remuneration methods exist salaried and hourly pay. Discerning the advantages and disadvantages of each is crucial for making informed decisions that align with the needs of your business.

    Understanding Salary vs. Hourly Pay


    Salaried employees receive a predetermined compensation at regular intervals, typically weekly, bi-weekly, or monthly. This fixed pay remains constant irrespective of the workload and is commonly expressed as an annual figure divided into periodic payments.


    Conversely, an hourly employee is compensated based on the hours worked. They receive a set rate for each hour and are eligible for overtime pay if they exceed the standard 40 hours per week.

    Pros and Cons of Salary and Hourly Pay

    Benefits of Salaried Positions

    Income Stability: 

    Salaried employees enjoy predictable earnings, facilitating effective budgeting and future planning.

    Perks and Benefits:

     Access to comprehensive benefits like health insurance, retirement plans, bonuses, and paid vacation is standard for salaried positions.

    Flexible Hours: 

    Many salaried roles offer flexibility, with less emphasis on strict clocking in and out.

    Cons of Salaried Positions

    Absence of Overtime Pay: 

    Salaried employees usually don’t receive extra compensation for overtime unless specified in their contract.

    Risk of Overworking: 

    The pressure to exceed the standard work hours without additional pay can challenge the work-life balance.

    Benefits of Hourly Wages

    Overtime Compensation:

     Hourly workers are entitled to overtime pay, typically 1.5 times their regular rate, for hours beyond the standard workweek.

    Work-Life Balance: 

    Hourly workers are paid for the hours worked, fostering a healthier work-life balance.

    Holiday Pay: 

    Many businesses offer premium pay for hourly workers on federal holidays.

    Cons of Hourly Wages

    Less Schedule Flexibility: 

    Hourly workers often have limited control over their schedules, making personal planning more challenging.

    Lack of Pay During Off Hours:

     Hourly workers only receive compensation for hours worked, with no pay during periods of illness or vacation.

    Variable Income: 

    Income for hourly workers can vary significantly, complicating budgeting and financial planning.

    Understanding these nuances empowers businesses to tailor their compensation structures to organizational and employee needs effectively.

    One of the most critical decisions you’ll make in the business world involves compensating your employees. Two primary methods exist salary and hourly pay. Understanding the benefits and drawbacks of each can help you determine what’s best for your business.

    Why Some Jobs Are Paid Hourly and Some by Salary

    The nature of the work largely determines whether a job is paid hourly or by salary. According to the Fair Labor Standards Act (FLSA), an employee must earn at least $35,568 annually and perform independent work more than 50% of the time to qualify for a salary.

    Usually, positions paying the minimum wage employ hourly workers, as the total earnings would only reach the salary threshold if the employee worked significant overtime hours. Similarly, businesses with inconsistent revenue or tight budgets often favor hourly workers, as they can more easily control labor costs by adjusting employee hours.

    Other Types of Wages: Freelancers and Contractors

    Freelancers and contractors have more autonomy in choosing how to charge for their work. They can opt for hourly rates or project-based rates.

    Hourly Rates for Freelancers

    Hourly rates can benefit freelancers in several ways:

    • Pay for All Time Worked: 

    Freelancers get paid for all their time working for a client, provided the client agrees to the invoiced hours.

    • Demand-Based Pricing: 

    Freelancers can adjust their rates based on their demand. They can increase their rates or prioritize higher-paying clients in high demand.

    However, tracking hours can be complicated, especially when working on multiple projects. Also, as freelancers become more skilled and efficient, they may need to adjust their rates to ensure they are not earning less for performing their work more efficiently.

    Project-Based Rates for Freelancers

    Charging a fixed amount for a project can also be appealing:

    • No Time Tracking: 

    Freelancers do not have to track their time, which can save them administrative work.

    • Reward for Efficiency: 

    As freelancers become more efficient, they can quickly complete projects, increasing their hourly rate.

    However, determining a fair project rate can be challenging, especially for new freelancers. It requires clearly understanding the project scope and accurately estimating the time and resources needed.

    Get Paid on Your Terms

    Deciding between salary and hourly pay for your employees depends on various factors, including the nature of the work, your business’s financial resources, and your employees’ preferences. Both methods have their pros and cons, and the best choice may vary from one situation to the next.

    Moreover, it’s essential to understand the rules and regulations governing exempt and nonexempt employees, as misclassifying employees can lead to legal issues and financial penalties.

    Ultimately, the decision between salary and hourly pay should be strategic, considering both the needs of your business and your employees’ best interests.

    >>Recommended Reading: Contracts with Employees in the U.S.<<

    Exempt and Nonexempt Employees

    In the context of salary vs. hourly pay, it’s essential to understand the terms “exempt” and “nonexempt.” These classifications relate to whether or not an employee can receive overtime pay.

    What is an Exempt Employee?

    An exempt employee is usually a salaried worker who is not entitled to overtime pay, regardless of how many hours they work per week. These employees typically include executives, supervisors, and other professionals whose duties involve significant discretion and independent judgment.

    What is a Nonexempt Employee?

    Nonexempt employees, on the other hand, are eligible for overtime pay. This group often includes hourly workers, who must be paid at least 1.5 times their regular hourly rate for any hours worked beyond the standard 40-hour work week. However, some salaried workers may also fall under this category if they meet specific criteria set by the FLSA.

    Misclassifying Nonexempt Employees

    Misclassifying employees as exempt when they should be nonexempt can lead to significant legal and financial repercussions. If a nonexempt employee is wrongly classified as exempt, they may be deprived of overtime pay they are rightfully entitled to, which could result in back pay, fines, and legal action.

    Classifying Exempt as Nonexempt

    On the other hand, classifying an exempt employee as nonexempt could lead to unnecessary overtime expenses for the employer. It’s crucial for businesses to correctly classify their employees to ensure compliance with labor laws and to maintain a fair and equitable workplace.

    Can You Switch Employees Between Salaried and Hourly?

    Employers can change an employee’s pay structure from salaried to hourly or vice versa. However, this should be done with care and transparency, and the employee must be notified of the change. Additionally, the employer must ensure that the new pay structure complies with all relevant labor laws.

    Making an Hourly Employee Salaried

    When transitioning an hourly employee to a salaried position, the employer must ensure that the employee’s annual salary meets or exceeds the threshold set by the FLSA for exempt employees. The employer should also consider how this change may affect the employee’s overtime eligibility and overall compensation.

    Making a Salaried Employee Hourly

    Conversely, transitioning a salaried employee to an hourly role requires calculating an appropriate hourly rate that accurately reflects the employee’s duties and responsibilities. The employer should also consider how this change will affect the employee’s eligibility for overtime pay and other benefits.

    Determining Wages for a Worker Going from Salaried to Hourly

    When converting a salaried employee to an hourly wage, the employer must first determine the employee’s regular hourly rate, which can be calculated by dividing the employee’s annual salary by the number of hours worked in a year. The employer should then consider any additional compensation, such as overtime, for which the employee may be eligible as an hourly worker.

    How to Determine if Hourly or Salaried Employees Are Best for You

    Several factors can guide your decision on employing hourly or salaried workers. These include:

    • Type of Work:

     Some roles are better suited to a salaried structure, while others lend themselves to hourly pay. For example, managerial or professional roles often work well as salaried positions, while roles that require variable hours or involve manual labor may be better suited to hourly pay.

    • State Laws: 

    Different states may have laws governing wage and hour issues. Understanding these laws and how they may impact your decision is essential.

    • Job Market Trends: 

    The current job market may also influence your decision. For example, in a competitive job market, offering a salaried position with benefits may help attract top talent.

    • Benefits Package: 

    If you want to offer health insurance, paid time off, and retirement plans, you might lean towards salaried positions.

    Bottom Line

    Deciding between salaried and hourly depends on what makes the most sense for your business needs and circumstances. By carefully considering the pros and cons of each approach, you can make a sound decision for the best of your business and your employees.

    Remember, the goal is to create a fair and equitable compensation structure that rewards employees for their hard work while supporting your business’s financial health and sustainability.

    >>Recommended Reading: How to Convert Minutes for Payroll in 3 Steps + Free Conversion Chart<<

    Frequently Asked Questions