Hourly vs Salaried Employees: Which is Best for My Business?

August 12th, 2019, 9:00 AM

The Law
Employees' work hours and wages are governed by the Fair Labor Standards Act. The Act covers businesses with annual sales of over $500,000, and/or are engaged in interstate commerce. Certain types of employment are exempted, such as some domestic workers, family members of agricultural business owners, and executive, administrative, or professional employees. A more complete description of which types of employment are covered by the FLSA can be found here. The FSLA sets forth the minimum wage that must be paid to employees and the rules for overtime payments. If your business is not exempt from the FSLA, it is important to know the rules before you hire any employees.

The Difference Between Salaried and Hourly Employees
The primary distinction between salaried and hourly employees is that hourly employees must be paid an overtime rate of 1 ½ times their regular hourly wages if they work more than 40 hours in a week. Salaried employees may work more than 40 hours a week without being paid overtime. Saving money on wages is not as simple as just declaring all employees to be salaried, however. Certain types of employees are exempt from the FSLA minimum wage and overtime rules – these include executive, administrative, professional, computer, and outside sales employees. Whether an employee fits into one of these categories is determined by their job duties, pay grade, amount of decision-making responsibilities, and other factors. If a job meets the requirements for exemption from the FSLA, you may pay the employee a salary and not be required to pay overtime. For non-exempt positions, however, you must pay an hourly overtime rate or provide for additional time off to compensate for overtime hours worked. You may pay a non-exempt employee a salary, but you must compensate him for overtime.

Business Needs
Since a salaried employee is paid regardless of the number of hours worked, it may not be practical to hire employees for salaried positions if your business is a startup, or if you are unsure exactly how much work you will have. For new businesses, it can be more cost-effective to use contract workers, who only work when called, or, if you need to be able to count on a worker's regular availability, an hourly employee.
For seasonal or peak-time businesses, hiring hourly employees also makes sense. It is not cost-effective to pay an employee during times when business is very slow or non-existent. However, if a business' slow season only lasts for a few weeks, it may be better to hire salaried employees and arrange their vacation schedules to coincide with your needs. This approach would lessen the chances of a trained and trusted employee finding a new job during your down time.

Employee Satisfaction
Keeping valuable employees should also be a consideration when deciding the best way to handle wages. Promoting an employee to a salaried position and then demanding excessive, uncompensated hours will probably result in poor work or loss of the employee to a competitor. On the other hand, if an employees' hours are too inconsistent, he may look elsewhere for a more reliable income.

Talk to a Business Attorney
If you are not sure whether your employees are exempt or non-exempt for purposes of FSLA compliance, or fit you need advice on whether it is best for your business to hire salaried or hourly workers, call Erie Law at (814) 315-9255 to arrange a consultation with a business law expert.

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