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Salary vs. Hourly Pay: What’s the Difference?

June 9, 2021

Salary vs Hourly Pay: What is the Difference?

The key difference between salary and hourly pay comes down to two things: Pay Rates and Overtime.

While salaried workers earn a fixed amount at the end of a stipulated period, hourly workers receive payment based on fixed hourly rates.

Several federal and state labor laws regulate how businesses should compensate employees for work done, and you should understand how they work. The Fair Labor Standards Act of 1938 (FLSA), under the US Department of Labor, spells out the minimum wage for employees, whether or not they earn overtime pay, exempt classifications, and the maximum working hours.

Learn the difference between salary and hourly pay and why it matters for you.

Here’s What We’ll Cover:

What is a Salary Pay Rate?

What is an Hourly Pay Rate?

Earning Paid Overtime

Salary vs. Hourly Pay: Which One Should You Choose?

Wrapping Up

More Payment Resources for Business Owners

What is a Salary Pay Rate?

A salary is a fixed rate payable to your employees on a specific schedule.

Businesses negotiate salaries in annual terms and then divide this amount by their payment schedule to know how much the employee gets weekly, bi-monthly, or monthly. If an employee’s gross salary per annum is $96,000 and your business has a monthly payment schedule, it means the employee earns $8,000 every month before tax deductions.

Many employers offer salaried positions to full-time employees. Full-time workers take on more responsibilities, have better career advancement opportunities, and work extra hours without overtime pay. In exchange for their commitment, salaried employees access benefits like health insurance, paid time off, and retirement plans.

What is an Hourly Pay Rate?

Hourly pay means remunerating employees based on the total number of hours worked over a specific time. In this case, you need to fix an hourly rate and multiply it by the total number of hours worked to know how much they have earned. This hourly rate must comply with the Federal Minimum wage and the minimum wage rate in your state.

Hourly employees do not have predetermined work schedules, so their wages vary from one paycheck to the other. However, they are entitled to paid overtime on extra hours if they work more than the standard 40 hours per week. Earning an hourly wage means an employee can make more money based on how long they work.

Many organizations prefer to pay hourly rates to part-time workers and contractors. Depending on their employment contract, you can ask hourly employees to work a fixed number of weekly hours.

Earning Paid Overtime

Paid overtime is the extra money employees get for working more than the weekly hours specified by the law. To find out whether your workers qualify for overtime wages, you need to know if they are exempt or non-exempt employees according to FLSA rules.

The Federal Labor Standards Act classifies exempt workers as employees who earn a salary and perform executive and managerial duties in an organization. These workers do not qualify for paid overtime.

Employees who earn hourly rates are non-exempt from paid overtime. The implication is you will pay non-exempt workers 1.5 times their typical rates for every extra hour they work, after the standard 40 hours per week.

Salary vs. Hourly Pay: Which One Should You Choose?

To decide whether to pay your workers a salary or hourly pay, you need to answer these three crucial questions:

What is Their Skill Profile?

First, understand the employee’s skill and see how it fits into the day-to-day running of your business. If this skill comes in handy once in a while, consider employing them on a contract or part-time basis with hourly pay.

How Important are They to My Business Goals?

Reflect on your business goals and map out the key roles the employee plays in achieving them. The most important question you should ask here is: Would my business function normally without this role? If the answer to this is no, you should engage the employee full-time and pay them a salary.

How Easy is It to Find Someone with This Skill Set?

If the employee’s skill set is rare and crucial to your organization, then you should extend a full-time salary offer to them. This creates some sort of safety net for your business because the worker has a higher level of commitment and wouldn’t leave without giving you ample notice.

Wrapping Up

One of the benefits of salary over hourly pay is that a salaried employee earns a consistent paycheck while the remuneration for hourly workers differs from paycheck to paycheck. On the flip side, hourly employees are entitled to overtime hours, and they can earn more money than salaried workers.

As you hire employees, you need to decide whether to pay them a salary or hourly pay. Many organizations keep their most important employees on an annual salary and adopt hourly rates and flexible schedules for contractors who handle one-off projects.

In the end, it all boils down to the structure of your business and the payment structure that works for you.