Salary or Hourly? How Should You Pay Your Employees?

Deciding how to compensate your employees is an impactful decision upon both you and them. Certainly, you want to attract high caliber talent and a steady salary is an attractive enticement for jobseekers. There are sound fiscal reasons, however, for opting to hire on an hourly basis in some cases.

Salary

Salaried employees are paid a fixed weekly or annual income. These positions provide a stable source of compensation and usually indicate a long-term career option which offers opportunities for professional growth. They often earn benefits like paid time off and as they move up the corporate ladder, becoming eligible for increasingly lucrative benefits. Workers who are paid salaries usually remain with a company longer than those who are paid by the hour. It’s important to note that most salaried employees (usually those in managerial or administrative positions) fall under the Fair Labor Standards Act’s (FLSA) exempt category, meaning they are not compensated additionally for hours worked past 40 per week. Certain salaried employees, however, are non-exempt, including certain secretaries and nurses, who do receive extra compensation when they work overtime.

Rationale for paying a salary for a position

One of the most important considerations in deciding how to pay an employee is how critical their position is to the functioning of the company. If, without this individual the business cannot function as usual, the security of a salary, benefits and the opportunity for upward growth within the company will help ensure they stay and don’t leave you high and dry.

Hourly

Hourly employees are paid a certain rate per hour of work over a determined period of time. Each state has set a minimum hourly wage. You may notice that the rate for hourly work fluctuates with supply and demand. The rate of an employee’s pay is determined based upon variables such as the nature of the labor, working conditions, experience, training or education. Employees who are paid hourly usually earn less than those who are salaried but are considered non-exempt under the FLSA and are eligible to earn overtime for every hour they work that exceeds 40 per week which amounts to 1½ times their normal rate.

Rationale for paying an hourly rate for a position

There are some jobs or skill sets that are only required on a temporary or part time basis, such as consultants or manual laborers. Workers who fill these positions are best hired by the hour.

A note on due diligence

It’s critical to pay those you hire in accordance with the (FLSA) as there are significant penalties for misclassification, even if it’s out of ignorance or error. State regulations vary but can include costly penalties such as payment of overtime back pay owed, back taxes including fines and interest and attorney’s fees. It’s prudent to consult with a Human Resources lawyer familiar with the regulations in your state for guidance when hiring.

The decision on who to hire and under what conditions is - mainly - up to you, the employer. It’s imperative to know the rules about salary and hourly compensation to obtain the best possible team and avoid expensive hiring errors.

How do you determine whether you pay employees a salary or by the hour?