Hiring a staff is a combined decision covering everything from their roles and responsibilities to the benefits offered. A decision that significantly impacts you as an employer is how you pay them – salary or hourly. The salary vs. hourly pay determines who you attract for the role and the long-term financial impact of hiring the staff for your business.
In simplest terms, a salaried staff receives regular paychecks irrespective if they work long on busy days or less on some days. On the contrary, hourly wages are paid to workers according to their work hours. They may be eligible for overtime if they work beyond the 40-hour workweek.
But the difference between salary and hourly pay systems is much more significant, which we’ll explain in this guide. We will explore the pros and cons of each to help you determine which is best for your business.
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Understanding salary and hourly pay
Apart from the security of steady paychecks, salaried staff have other benefits and earn more than hourly workers. You must provide benefits like bonuses and paid vacation time to a salaried worker.
There is no such obligation for hourly staff, but some are eligible for overtime. According to the Fair Labor Standards Act (FLSA), an hourly staff can be classified as “exempt” or “non-exempt” depending on their eligibility to work overtime. Hourly workers eligible for overtime are non-exempt, while ineligible ones are exempt. FLSA regulations regarding minimum wage and overtime compensation protect the “non-exempt” hourly workers. They are entitled to 1.5 times the hourly pay per hour they work over the standard 40-hour workweek.
The U.S. Department of Labor’s Wage and Hour Division has clear guidelines regarding which staff can be considered “exempt.” They must satisfy the following requirements:
- Earning at least $684 per week
- Working in an administrative, computer, executive, professional, or external sales position
- Have the authority to make significant decisions
Ability to create and implement company policies
- Must be working in a management role
Before you decide how you will pay the new staff, it’s essential to consider hourly vs. salary pros and cons.
Understanding the different benefits of each compensation is essential to know if hourly or salary is better for your business.
Let’s explore a few benefits and downsides of salary and hourly pay.
Benefits of salary pay
Full-time, salaried staff typically get additional perks like health care, 401(k), and paid vacation time. This allows you to attract better people for work.
Salaried staff are expected to receive the set amount consistently every month or year. A steady payroll simplifies accounting, and there are fewer mistakes.
Salaried workers can be given more responsibilities, and you won’t have to pay wages for extra work on busy days. Also, such staff have better career prospects than hourly staff as they have more long-term promotion opportunities.
Disadvantages of salary pay
You must pay the staff a set amount, even if their clock hours are less. This limits you from adjusting costs if your revenue fluctuates during slow seasons.
It is legally required to pay at least $684 per week to salaried workers. It is higher than what you would generally pay an hourly worker for 40 hours at minimum wage
Pros and cons of hourly pay
In some cases, your business can benefit from hiring hourly staff. For instance, you can add extra workers to the workforce during the busy season by paying hourly without making any full-time commitments.
Advantages of hourly pay
- You get the flexibility to adjust the cost of paying workers based on expected revenue by easily reducing the worker hours.
- Hourly workers are part-time workers who don’t need to be paid extra benefits, just overtime.
Productivity can be easily measured for hourly workers by tracking their time on the job using attendance systems like Truein.
Disadvantages of hourly pay
- Payroll management is challenging if the schedule varies. It will require hourly workers to get paid different amounts.
- Hourly pay is usually higher than salary pay. Also, the overtime wage is higher.
- Hiring senior staff on hourly pay is challenging as they seek more stability and benefits.
Factors to consider when choosing pay structure
Most organizations choose to hire a mix of salaried and hourly workers for optimum workforce cost and productivity. There are several factors to consider when deciding the compensation type for the staff, as discussed below.
1. Position type
Salary pay is the proper compensation if you want a floor manager or supervisor with years of experience. Most senior workers seek a stable paycheck and additional benefits when applying for work. Therefore, for senior positions, it is recommended compensation type.
2. Work hours
Hiring hourly workers can result in significant cost savings if your business has fluctuating schedules, with some periods requiring more work. Hourly workers are part-time workers who are not expected to receive insurance and 401(k) benefits.
3. Productivity measure
Is hourly or salary better for your business depends on how you measure your workers productivity. For instance, a worker’s presence at the site directly impacts output and revenue if you are in a service industry like construction or mining. Here, hourly pay is ideal. By contrast, if productivity depends on outcomes or deliverables rather than time spent at work, such as for project managers, staff seek full-time employment with steady paychecks and benefits.
How can Truein help?
Whether you offer a salary or hourly pay, you need a tool for efficient time and attendance tracking. Truein is a complete solution for managing time and attendance for your staff. With its inbuilt policy templates, you can easily follow federal guidelines for salaried and hourly workers if you have a mixed workforce. It is a contactless face recognition attendance system that can be deployed on workers’ phones for attendance clock in and position tracking. There’s much on offer, including multi-site deployment, payroll-ready reports, 70+ customizable policies, and more. Learn more about Truein’s full features here.
Paying a worker with a salary vs. hourly pay is not just about money. While cost is a substantial factor, it’s also essential to consider the role requirements and how productivity correlates to time spent on the job before making the decision.
The difference between salary and hourly compensation, as discussed, provides a clear view of the pros and cons of each compensation type. Depending on the factors critical for your business, make the final choice.
Frequently Asked Questions (FAQs)
1. Can a salaried staff work fewer than 40 hours a week?
Yes, a salaried staff can work fewer than 40 hours a week. Salaried workers are expected to fulfill their job responsibilities in most industries regardless of the number of hours worked. Hence, they can work less or more than 40 hours a week without pay change.
2. Do hourly workers get paid for holidays?
In the U.S., paying hourly workers for holidays is not mandatory. It entirely depends on the employment contracts and company policies.
3. Are salary positions more prestigious than hourly positions?
While prestige associated with a position is subjective, salaried positions tend to attract more senior workers. The higher-level roles and management positions mostly do have salary compensation.
4. Can an hourly staff become salaried?
Several companies allow an hourly worker to transition to a salaried position. The transition usually occurs when an hourly worker performs excellently or takes on additional job responsibilities.
5. Which pay structure offers better benefits?
Salary pay offers more comprehensive benefits like retirement contributions, healthcare coverage, and paid vacations.