Salary vs. Hourly Pay: Which One Is Right for Your Business?

December 21, 2022 - By Edgardo Ocampo

Salary Vs. Hourly Pay: Which One Is Right for Your Business?

Salary vs. Hourly Pay

Deciding between salary and hourly pay for your employees depends on various factors, including the size of your business, the type of work that needs to be performed, and the industry you operate in.

This article will look at the difference between salary and hourly pay, comparing and contrasting the advantages and disadvantages of each, helping you to determine the best approach for your business.

What Is Salary Employment?

Salary employment involves regular, consistent compensation for full-time employment.

The compensation is not calculated based on the number of hours an employee works each pay period. Instead, it's calculated based on the yearly compensation and the number of pay periods each year.

What Are the Benefits of Salary Employment?

The main benefit of salary employment is consistency, as the business has to pay the same amount regardless of holidays, sick days, vacation days, or incidental overtime. So, there is no need to recalculate payroll every week or month, reducing the workload for the payroll department and decreasing the chance of payroll errors.

salary employee pros and cons

What Are the Challenges of Salary Employment?

In general, salaried employees are paid a fixed amount based on 40-hour workweeks. This means that even if the employees had to work longer hours due to an emergency or special project, they would not be paid for the additional time.

This can lead to problems with the employees' morale and productivity if the employer asks the employees to work overtime on a regular basis.

What Roles in a Company Are Typically Salary?

Salaried employees are often found in management, legal, and administrative roles. These types of roles require consistent hours and a higher level of expertise. However, there can be exceptions to this as some jobs, such as customer service and IT roles, may also be salaried.

Some of the most common salaried positions include:

  • Accounting
  • Architecture
  • Banking
  • Bookkeeping
  • Business Administration
  • Counseling
  • Database Administration
  • Distribution and Logistics
  • Economics
  • Engineering
  • Finance
  • Graphic Design
  • Human Resources
  • Information Security
  • Law
  • Marketing and Advertising
  • Network Administration
  • News
  • Politics
  • Quality Assurance
  • Research and Development
  • Social Media Management
  • Software Development
  • Teaching and Education
  • Training and Development
  • Website Design
9/80 Schedule

What Is Hourly Employment?

When an employee is paid hourly, his or her pay is calculated based on the number of hours worked each pay period. However, the number of hours worked is not the only factor that affects an employee’s pay.

Other factors that affect how much an employee earns are:

  • Overtime
  • Holiday pay
  • Shift differentials

What Are the Benefits of Hourly Employment?

The biggest benefit to hourly wages is that it allows employers to pay only for the work that is being done. Thus, if the employer needs additional hours, it can pay employees more money; if the hours are not needed, the company can refrain from scheduling employees without financial repercussions. This allows businesses to adjust their costs based on revenue.

On the other hand, hourly employees also benefit from the flexibility of hourly employment. They are not tied to a set number of hours each pay period and can work as much or as little as they need to.

What Are the Challenges of Hourly Employment?

Calculating the payroll for hourly employees can be complicated and time-consuming. Employers must keep track of the number of hours worked as well as other factors that could affect the employee’s wages, such as overtime pay, holiday pay, and shift premiums.

This can lead to costly mistakes that can be difficult to correct. So, it's important that businesses take the time to calculate an employee’s wages accurately and verify the correct amount is paid out.

One of the ways to deal with this problem is to use a time tracking system that will accurately calculate the employee’s wages automatically. This eliminates the need for manual calculations and reduces the chance of errors.

What Roles in a Company Are Typically Hourly?

Hourly employees are often found in positions involving manual labor, such as:

  • Assembly
  • Automotive Manufacturing
  • Automotive Repair
  • Carpentry
  • Construction
  • Cooking
  • Driving
  • Electrician
  • Food Service
  • Heavy Equipment Operation
  • HVAC
  • Iron Work
  • Janitorial and Custodial
  • Law Enforcement
  • Mining
  • Plumbing
  • Printing
  • Retail
  • Security
  • Substitute Teaching
  • Tool and Die
  • Tutoring

How to Calculate Pay for Salary Vs. Hourly

Salaried employees are paid a fixed amount each year. This means their hourly rate is calculated by dividing their annual salary by the number of pay periods in a year.

For example, if someone’s annual salary is $48,000 and they are paid every two weeks (26 pay periods a year), their paycheck would be $1,846.15 for each pay period.

Note: even though most salaried employees are not paid for overtime, they may still be eligible for it if they work more than 40 hours in a week and their annual salary is less than $35,568 per year.

If you are interested in learning more about pay periods and how they work, you can read our blog post: What is a Pay Period? How Are Pay Periods Determined?

How to calculate pay for salary vs. hourly

On the other hand, the way to calculate wages for an hourly employee is quite simple.

All you need to do is multiply the individual's hourly rate by the number of hours he or she worked during a given pay period. For example, if an employee earns $10 per hour and works 40 hours weekly, the worker's paycheck for that week would be $400.

However, it's important to remember that overtime pay and other factors may be added to the employee’s wages and that not paying the correct amount could lead to costly penalties.

So, if an employee works five extra hours on top of his or her regular 40 hours, then the employee would be entitled to be paid time and a half for those hours. This means the employee would be paid $15 per hour instead of $10, and the paycheck for that pay period would be $475 ($400 + $75).

Another important thing to check when calculating employees' hourly wages is to ensure you comply with the Fair Labor Standards Act (FLSA) and local labor laws. These laws set minimum wage and overtime requirements for employers, and you must follow them or face potential penalties.

Which Option Is the Best for Your Company?

Depending on your company, you might need to hire salary employees, hourly employees, or a combination of both. The best option for your company will be to evaluate the unique needs of each role and determine which type of employee is the most suitable for it. To help you decide, we've put together a few questions to help you decide:

If YES, then the employee MUST be paid hourly. The employee is entitled to minimum wage and overtime.

If NO, then the employee may be paid hourly or salary.

If YES, then hourly employment may be more cost-effective.

If NO, then salary employment may be more cost-effective.

Employment is a business transaction. In the same sense that an employer is shopping for employees, employees are shopping for employment.

The employer wants some combination of the employee’s time, effort, expertise, and ability to provide value. It is in the employer’s best interest to determine what prospective employees want.

State laws may vary from federal laws. If a state law differs from the FLSA, the standard that provides the most protection to employees wins. Click this link to find the state labor department's contact information.

The Affordable Care Act may impose penalties on employers with at least 50 full-time employees if they do not provide health care coverage to 95% of those employees. The employer has the option to pay the penalty for each full-time employee or to provide health care coverage.

If the employer chooses to include health care as part of the compensation, the employer is subject to local, state, and federal laws regarding benefits and coverage.

It is possible to switch an employee’s compensation from hourly to salary if the work for the role meets the FLSA criteria as exempt.

It is possible to switch an employee’s compensation from salary to hourly if the employee does not have a contract preventing such a change. Consult with human resources and legal representatives before taking such an action.

Hourly and salary wages are both considered earned income, and they are both taxed the same way

Salaried employees are entitled to their full salaries regardless of their workload. There are exceptions. If there is a problem, consult with human resources and legal representatives.

Employers may specify work schedules, require employees to track hours, and mandate employees to make up absences. In practice, salaried employees sometimes work additional hours and may work fewer hours from week to week. This often works to the employer’s benefit.

If an employer is concerned about an employee’s occasional doctor’s appointment, long lunch, or desk time, this may indicate the employment should be hourly.

How Can OnTheClock Help You Keep Track of Your Salary and Hourly Employees?

It doesn't matter if you have a few employees or a large workforce. OnTheClock can help you manage all of your salary and hourly workers easily.

With the help of our easy-to-use solution, you can keep track of your employee hours and streamline the payroll process, allowing you to save time and stay compliant.

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