Hourly vs. Salary: Tips for Deciding Which Is Best for Your Employees
Employers can pay nonexempt employees by the hour or through a fixed salary, but that decision is influenced by the employee's role, job duties, compensation and industry. There are pros and cons for both the employer and employee when deciding hourly vs. salary – neither is objectively better. It's important to keep regulations and industry standards in mind for your balance of hourly and salaried employees.
As you build your organization's workforce, you'll need to decide if you want to pay your nonexempt employees by the hour or with a salary. It's not necessarily a straightforward classification process, and it requires you to think about the nature of each role, the job duties, the compensation and the standards in your industry.
No matter which you opt for, you'll need to factor in the relevant labor laws and wage and hour rules and understand how they differ for hourly and salaried employees.
Here are some considerations to help you decide whether hourly vs. salary compensation makes the most sense in a given hiring scenario.
What are the benefits of having hourly employees?
Flexibility and cost efficiency are the two primary benefits of hiring employees at an hourly rate. Employers have the flexibility to bring on as much talent for as much time as they need without needing to pay for more time than is actually worked. Employers can also build out a team of hourly employees to call in whenever the need arises without incurring additional costs. And since the employer can cap the number of hours an hourly employee works there may be the option to not offer and pay for benefits.
Hourly employees often offer a significant benefit to businesses that experience high fluctuations throughout the year. For example, retailers that employ seasonal talent at an hourly rate can flex their workforce up or down during different high-traffic periods without paying salaries to those employees year-round.
What are the drawbacks of having hourly employees?
As much as benefits like flexibility and cost efficiency can help employers keep costs low, there may be a trade-off. Constant fluctuations in the number of hours worked can mean more time spent tracking, scheduling and monitoring employees to make sure you have the coverage you need. In some roles, inconsistent or unpredictable hours might potentially impact productivity or a need for increased training support throughout employment.
"Fortunately, today's time-and-attendance technology can automate this process and deliver significant time savings for organizations that would otherwise benefit from the advantages of employing an hour workforce," says James McGeady, senior director of product marketing, ADP.
Also, under federal law, employers are required to pay hourly workers overtime pay when they work more than 40 hours per week. Depending on how often situations come up where employers will need employees working overtime, this might create additional costs and significantly influence whether having hourly vs. salary employees is a better fit.
Choosing to hire hourly can also affect the employee experience and how loyal or engaged employees are. If employees prefer hourly employment, it works in the employer's favor. But for some people, hourly status can make them feel less connected or loyal to the organization, which can lead to frequent turnover and time spent recruiting replacement talent.
What are the benefits of having salaried employees?
Employers and employees gravitate toward salaried positions for the stability and predictability they offer both parties. For employers, having salaried employees can provide clarity around how to manage teams while also streamlining the administrative overhead required to run the company. For example, employers don't need to dedicate as many resources to tracking hours, overtime and paychecks because salaried employees have less irregularity in those areas. However, it should be noted that if salaried employes are not being paid more than the minimum threshold, they may need to be classified as non-exempt and this still eligible for overtime.
Hiring for salaried positions can also result in more loyalty and stability among employees. These roles often come with appealing benefits packages and the potential for building a long-term relationship with career advancement opportunities. Employees who earn a salary may be more likely to commit to the company, get involved with their team and take the initiative to exceed expectations.
However, with offering benefits and paid time off to salaried employees comes required tracking and accounting for time off. So, while tracking their hours worked as closely may not be necessary, tracking accrued time off balances and eligibility for other leaves will be required.
What are the drawbacks of having salaried employees?
The drawbacks of hiring salaried employees focus mainly on long-term costs. Offering salaried employment is often more expensive than hourly employment, because the company guarantees a certain amount of work or payment each week and likely includes benefits such as health insurance, paid leave and a retirement plan. The process of recruiting and hiring salaried employees can also be more involved and bring an added cost of as much as 30 percent of the job's salary to replace the person if they end up leaving.
For example, if an organization is hiring for a role that is fundamental to the company and will be a key position for the company's strategy for the next three to five years, it might make sense to invest in a salaried employee for that position. However, if an organization is hiring for a role that has a temporary benefit, such as a particular product rollout or promotions for a one-time event, it might make more sense to hire an hourly employee to accomplish the short-term goal and then reassess it at the end of a particular timeline.
How do industry norms factor in?
Industry norms for paying employees tend to exist for a reason. For example, hospitality businesses often pay their workers hourly because of the seasonal demand of their industry. However, while an extra hotel desk clerk may only be needed during the summer months, a general manager may be needed all year. By looking at industry's norms, an employer can get a good feel for which wage structures make the most sense for the types of workers it employs.
"Regardless of which direction employers choose, technology can help with the administration of time tracking and scheduling for hourly workers and the tracking of PTO and leave benefits for salaried workers," McGeady says. "That can simplify the decision for employers by making it so they can base the decision on what is best for the business when it comes to the talent management needs of the business – coverage needs, seasonal fluctuations, challenges with recruiting, hiring and retention and other talent management considerations."
Are there unique business needs to meet?
In the absence of, or in addition to, industry norms, employers should look to their own business needs in the discussion of hourly vs. salary employees. As Entrepreneur puts it, "If you regularly need to ramp your headcount up or down — say, on a monthly or seasonal basis — then it usually makes more sense to pay an hourly wage. But to retain a stable workforce with high skills and low turnover, salaries are a better bet."
What regulations need to be considered?
The Fair Labor Standards Act (FLSA) is a federal wage and hour law that requires most employers to adhere to certain minimum wage and overtime requirements. Under the FLSA, employers are required to track and maintain records of hours worked by every nonexempt employee and pay them overtime – time and a half – for any time worked over 40 hours in a work week. The U.S. Department of Labor, which is responsible for enforcing the FLSA, requires following certain employee classification rules.
Employees who are "exempt" from the FLSA are not eligible for overtime. Remember that even though the terms "hourly" and "nonexempt" are often used interchangeably, nonexempt employees can be paid on either a salaried or hourly basis. It's important to remember if salaried employees are not paid the minimum threshold for exemption, they are entitled to overtime. In either case, employers must track all hours worked by nonexempt employees and pay them overtime for working if they work more than 40 hours in a work week.
Finally, employers must not forget to follow the state and local labor laws and wage and hour rules for all the locations in which they, as these jurisdictions may have their own requirements. Employers should always comply with the rule that's most generous to the employee. And especially in ambiguous situations like this, they shouldn't hesitate to bring any questions they may have to their legal advisor.
What about switching employees from hourly to salaried?
There are rules and regulations that govern changing an employee from hourly to salaried. Most importantly, the worker must meet FLSA requirements and state laws that qualify them as exempt. If they meet these requirements, they can be converted to a salaried role when they are going to take on a new position or if their team is reorganized.
What about switching employees from salaried to hourly?
It's not as common to switch employees from salaried to hourly, but it does happen. For example, a business might find that it has less work for an employee than planned. In this scenario, the employer would first check the employment contract to make sure there is nothing preventing this change. Then the employee's job description must be adjusted to comply with a 40-hour workweek (or that they will now receive overtime if they work more than 40 hours per week).
The bottom line
Employment classification is an important area where employers can be strategic about how they plan their organization's workforce. These tips for determining whether employees should be classified as hourly vs. salary — or how to transition between them — should provide some ideas about best next steps for balancing operational needs, legal compliance and employee welfare within an organization.
ADP offers a wide range of tools that help businesses of all sizes manage payroll, with solutions that provide people data that can make employee classification decisions simpler and help you keep up with compliance. Check out our variety of payroll services.
