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Understanding salary vs. hourly pay, including both their key differences and common pros and cons, is an important concept that businesses should be acquainted with. Having a grasp on each can help businesses decide on a compensation structure that makes the most sense for their organization. In this guide, we’ll take a ‘birds-eye’ view of how salary versus hourly employee pay works, cover some of the industries that favor each approach, and discuss how each payment method can impact the team members you hire.
Salary overview
Simply put, a salary is a fixed annual amount an employer distributes on a set schedule. For example, an employee who has an annual salary of $75,000 will receive regular gross payments of $6,250 each month. Employers must calculate payroll taxes and other deductions from this monthly total, leaving the employee with a slightly reduced amount.
An employee who is paid a salary is considered exempt per the FLSA and not entitled to overtime pay. Before salaried employees begin working, their offer letter will generally specify how much they’ll make in a year, the number of hours they must work per week, and the job responsibilities they must fulfill to continue receiving their salary. Employers often also provide benefits to salaried employees on top of their pay, such as health insurance, retirement plans, and paid time off.
A common question that comes up from employers is how to handle situations when employees who receive a salary need to take time away from work. To learn more, we asked Peggy James, a certified public accountant with over ten years of experience helping business owners.
Do salaried employees get paid if they do not work?
“It depends on the employer and the employment agreement, but most employers offer salaried employees some type of paid time off,” she explains. “Some employees will receive vacation and sick time as well as holidays, too.”
— Peggy James, Certified Public Accountant (CPA)
Peggy also points out that other employees may have a bank of paid time off (PTO) that can be used either for vacation or for sick time. In either case, it is common for employees to accrue vacation time or paid time off at a rate based on the number of years they have worked for the employer.
Though situations vary, If an employee does not work on a particular day, they will typically use their vacation hours or PTO and be paid for the day.
Why can paying by salary be a good fit for employers?
Whether it is a better fit to pay a salary or by the hour can often depend on who is asking the question. Again, we spoke with Peggy James, who shares some of her thoughts on why paying by salary can be the way to go (and when paying by the hour can be the better option a bit further into the article).
In many cases, paying a salary instead of an hourly rate can benefit the employer more than the employee. Because a salaried exempt employee isn’t specifically paid for time worked, it is not unusual for exempt employees to work more than a standard 40-hour work week. If they do, they will not be paid more for the additional time they work. An hourly employee, on the other hand, may benefit from being paid for all of the time they work. If they work more hours, they will receive more pay.
— Peggy James, Certified Public Accountant (CPA)
One thing to keep in mind is that the government has strict definitions about what types of employees are exempt from overtime rules. An employer can’t just decide to make a position exempt to avoid paying overtime. Instead, the job must fit the definition of an exempt position to be classified as exempt from overtime rules.
Peggy also says employers should be prepared in the event that some employees need time for making the mental shift from being paid hourly to salaried (or vice versa).
“Aside from the type of work being performed, the main difference is that salaried employees are not specifically paid for the amount of time they work. Instead, they are being paid to do a job and complete their responsibilities regardless of how much time it takes to do so.”
What are the benefits of being salaried?
Salaried employees enjoy various advantages. Some of the most significant benefits of receiving a salary include:
- Stability and predictable income: Fixed payments give employees a general idea of what they’ll earn each pay period. This provides stability when budgeting and planning for the long term.
- Access to benefits and perks: Salaried jobs often pair with benefits and perks such as health coverage and paid sick leave.
- Incentives and opportunities for career advancement: These roles often come with the possibility of earning a raise, bonus, or promotion based on good performance.
Disadvantages of salaried employment
Though having a salary is often seen as preferable to an hourly wage, it has a few disadvantages. Some of the drawbacks of a salaried position include:
- Increased responsibilities and expectations: Because employees with a salary have more set income, their employer may require more of them in terms of productivity and performance quality.
- Potential for poor work-life balance: Salaried employees may need to make calls or attend business trips outside their regular work schedule. This can negatively blur the lines between professional and personal time.
- Overtime pay: If salaried employees aren’t eligible for overtime pay as specified in the federal overtime rule, they will be paid for a 40-hour work week regardless of whether they work more than that amount.
- Fixed pay despite challenges: Salaried employees will receive the same monthly payments after payroll deductions regardless of how complex or easy their tasks are.
Hourly pay overview
Employees who don’t meet the FLSA requirements to be exempt are classified as non-exempt and must be paid hourly. This means an employer pays their employee for every full hour of work. Employers and employees will agree on an hourly rate before the work begins.
To calculate an employee’s hourly wages, you multiply the hours an employee has worked by their hourly rate. If an employee makes $25 per hour and works 40 hours a week, their pay before taxes is $1,000 for that week.
Employees with hourly positions that work over 40 hours a week may be entitled to receive overtime pay, which is at least time-and-a-half. If employees work 45 hours a week, with a base rate of $25 per hour, they still earn $1,000 for the first 40 hours. The additional 5 hours would be 25 multiplied by 1.5, meaning they earn $37.50 per hour during overtime. Then multiply 37.5 by 5 to get $187.50 for their overtime pay. Finally, add the $1,000 and $187.50 together for a total of $1,187.50 for 45 work hours.
Why can paying hourly be a good fit for employers?
Once again, we spoke with Peggy to gain her professional insight into why, depending on the business, hourly pay may be the best option.
Paying an employee hourly (as long as they qualify under the FSLA) can be beneficial for employers. It gives the employer more control in terms of setting work schedules and planning coverage for the business. It also allows for flexibility when scheduling employees to work.
— Peggy James, CPA for small businesses
For example, if the employer knows that certain days of the week or times of year are busier than others, they can schedule employees to work more hours during those times. On the flip side, if they don’t need as many employees during certain shifts, they can adjust staffing accordingly.
What are the benefits of being hourly?
Hourly employment comes with some benefits salaried employees don’t receive. These advantages include:
- Flexibility in work hours: Employers often set hourly workers’ schedules one or two weeks earlier. This makes requesting certain work times or time off easier with less notice.
- Pay directly tied to hours worked: Working hourly means employers pay their workers for exactly how much work goes into doing their job.
- Potential opportunity for overtime pay: Workers eligible for overtime who put in more than 40 hours a week will receive extra compensation for the rest of their work time.
- Healthy work-life balance: When an hourly worker clocks out, they don’t have to worry about unexpected tasks to complete. This draws a clear boundary between personal and work time.
Disadvantages of hourly employment
Employees who are paid hourly have some disadvantages as well. Some of the drawbacks to hourly employment include:
- Limited benefits: Hourly workers often don’t receive the same benefits as salaried employees, such as health insurance or paid time off.
- Income stability: Employees earning an hourly wage can earn less if the employer suddenly offers fewer hours per week.
- Potential income variability: Because schedules can change from week to week, hourly employees may find it challenging to plan their finances over the long term as their incomes can vary.
How do employers determine who should receive salary vs. hourly pay?
This is largely determined by the FSLA, which means it depends on the work performed. The first step in figuring out which employees to pay a salary and which to pay hourly is to understand the type of work required for the job and see how that fits within the FSLA. Employers can read the law themselves and make their own determinations, but many will be better off enlisting the help of a payroll company or attorney to make sure they’re complying with the law. The federal government can penalize companies for repeated and willful violations of the FSLA, so it’s important to get this right.
The table below can help you get a better sense of how each pay structure comes into play also.
Salary vs. hourly pay comparison
| Consideration | Salary | Hourly |
| Payments | Annual salary divided into regular fixed payments | Hourly rate multiplied by hours worked |
| Work hours | Typically 40 hours per week, but some jobs offer flexibility | Assigned schedule each week |
| Overtime | Usually unpaid as employers factor extra work into the salary | Usually paid after working 40+ hours in a week |
| Benefits | Often eligible for employer-sponsored benefits | May be eligible for fewer benefits than salaried employees |
| Income stability | Steady pay and work | Amount of work hours may change weekly |
| Work-life balance | Work and personal time may blur together | Clear distinction between work and personal time |
Considering job type and industry
Receiving a salary or hourly rate can depend on the agreement between an employee and employer as well as the type of work being performed. However, some common positions and industries are more likely to align with one of the payment methods over another. For example, corporate workers, medical professionals, and engineers often receive salaries because their positions are classified as exempt from the FLSA, while those who work retail, food service, and transportation jobs often receive hourly wages for these non-exempt positions.
Some common salaried positions include:
- Chief executive officer
- High school teacher
- Doctor
- Software developer
- Journalist
- Manager
Common hourly positions include:
- Cashier
- Waiter
- Carpenter
- Factory worker
- Bartender
- Retail worker
Understanding salary vs. hourly pay makes good business sense
Figuring out if your small business should have salaried or hourly workers can depend on a number of factors, from the type of services your company provides to how often employers interact with customers. Whatever option you choose, it’s best to have reliable software to make paying employees hassle-free so you’re automating payroll calculations instead of risking errors by doing this with spreadsheets. Many online payroll providers can help you save time and avoid payment mistakes — and unwanted attention from the IRS — while handling federal, state, and local taxes.
Best of luck as you decide the pay structure that best fits your organization and we welcome your questions!
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.