Salary vs Hourly Employees: A Brief Overview

The decision whether to pay a salary or hourly is an important question for all business owners. And, a job candidate needs to consider the tradeoffs when deciding whether to accept an offer.

A common misconception about compensation is that non-exempt workers must be paid hourly. This is not the case; employers have quite a bit of discretion in that area, which raises a couple of issues. First, from the company point of view, is it preferable to pay hourly or establish a salary for positions that could go either way? Second, from the job seeker’s point of view, am I be better off being a salaried or hourly employee?

Depending on the situation, the decision of whether to go with a salary or hourly wage can have a substantial effect on not only overall payroll expense and earnings, but also administrative costs, operational flexibility, morale, job satisfaction and a host of personal lifestyle issues.

This infographic will help prevent employers and employees from jumping to conclusions, which is easy enough to do whenever compensation decisions are pending. For instance, a job seeker might be tempted to accept what appears to be a generous salary but fail to consider the average workload is upwards of 60 hours a week. Or, a company might set up a particular position as hourly because it’s a standard practice in the field, without taking into account how a salary structure could reduce administrative costs enough to create a major competitive advantage.

So which is better for employers and employees, a salary or hourly wage? Depending on the situation, one form of payment could be significantly preferable to the other. Here are important things to consider.

SALARY

• A salary provides a stable income stream to the employee.
• Since the amount paid is fixed and predictable, budgeting is easier — for both the employer and the employee.
• While a salary is more predictable for employers, it means committing to this outlay even in slow periods.
• Full-time, salaried employees are entitled to benefits such as health insurance and paid time off that most hourly employees are not.
• Employers are less likely to reduce the pay of salaried employees than cut back hourly workers.
• Slaried employees may have to put in more than 40 hours per week to get the work done, a benefit for employers.
• Pay is for results rather than hours worked. The employee is paid the same whether the assignment took three hours or nine hours.
• Salaried workers tend to stay on the job longer and be more loyal to the employer.

HOURLY

• Gives seasonal businesses flexibility over labor costs with the ability to assign hours and adjust shifts to meet demand.
• When seeking part-time workers, hourly pay is generally the more logical option.
• Hourly pay may give workers more flexibility in their work schedules.
• Part-time, hourly work allows salaried workers to pick up extra income to supplement their salary, and allows employers to ramp up during certain periods.
• Hourly pay makes workers more vulnerable to cutbacks in their hours.
• Workers get paid for exactly the time they put into the job, including time-and-a-half for overtime,which is good for employees but not for employers.
• Requires much more administrative overhead to calculate hours, overtime, etc.
• Employers save on the costs of providing health insurance and other benefits, while employees have to arrange for their own medical insurance.

Steve Capper is Managing Member and CEO of Flexible Funding, a payroll-financing company for staffing agencies. He received his Bachelor of Science in Business Administration from the California State University system (majors in both Marketing and Accounting specialties). In 1992, Capper teamed up with currently retired Flexible Funding Managing Member/CFO Steven Elias, an (then) active veteran of the staffing industry, to start Flexible Funding.