Salary vs. hourly: How to choose the best for your business

Choosing the right pay structure—salary or hourly—is a pivotal decision for any organization, directly influencing employee satisfaction, productivity, and compliance. Each structure offers distinct advantages and challenges, depending on the nature of the role and the company's operational needs. This article compares salary and hourly pay, how they work, and their implications for your workforce. By understanding these differences, you can make more informed decisions that align with your business goals and employee expectations.

What is salary pay?

Salary pay refers to a fixed compensation paid to employees regularly, regardless of the number of hours worked. Salaried employees are typically classified as exempt under the Fair Labor Standards Act (FLSA), meaning they are not eligible for overtime pay. They get paid on a consistent schedule—weekly, biweekly, or monthly—making it predictable for employers and employees.

For an employee to be classified as salaried, their earnings must meet the FLSA minimum threshold, which is currently $684 per week (or $35,568 annually). These roles often come with additional benefits like health insurance, paid time off, and retirement plans, making them attractive to employees looking for stability and long-term career growth.

Common salaried jobs in the US:

• Accountant
• Teacher
• Lawyer
• Financial analyst
• Software engineer

Salaried positions are generally associated with roles that require specialized skills, consistent schedules, or strategic responsibilities, making them a common choice in professional industries.

What is hourly pay?

Hourly pay is a compensation structure where employees are paid based on the exact number of hours they work. Unlike salaried employees, hourly workers are typically classified as non-exempt under the Fair Labor Standards Act (FLSA), meaning they are eligible for overtime pay. Overtime is calculated at a rate of 1.5 times the employee’s regular hourly wage, typically for any hours worked beyond 40 in a workweek—though some state laws require overtime pay to be calculated daily, so it’s important to know the requirements for your jurisdiction.

Hourly pay provides flexibility for businesses, as wages directly correlate to the time worked. However, this can lead to fluctuating payroll costs based on workload demands, making it ideal for roles where schedules vary or overtime is common.

Common hourly jobs in the US:

• Servers and bartenders
• Construction workers
• Retail sales associates
• Repair and maintenance technicians
• Administrative assistants

Hourly positions are often found in industries that require on-demand labor or have variable workloads, allowing employees to earn additional income through overtime. However, this pay structure may lack the predictability and benefits often associated with salaried roles.

4 differences between salary and hourly

When deciding between salary and hourly pay structures, understanding the key distinctions is essential because each pay structure comes with its own unique advantages and challenges. The difference between salary and hourly pay impacts not only how employees are compensated but also their access to benefits, job stability, and overtime eligibility. Below are four primary differences to help you determine which approach is best for your workforce.

1. Paychecks

• Salary pay: Employees receive a fixed paycheck at regular intervals, regardless of the number of hours worked, providing consistent income.
• Hourly pay: Paychecks fluctuate depending on the hours worked, with payment tied directly to the number of hours recorded.

2. Overtime pay

• Salary pay: Salaried employees classified as exempt are not eligible for overtime pay, regardless of hours worked beyond 40 per week.
• Hourly pay: Non-exempt hourly employees receive overtime pay at 1.5 times their hourly rate for any hours worked over 40 in a workweek.

3. Job security

• Salary pay: This gives salaried workers a sense of stability, as their paycheck is predictable and not subject to hourly fluctuations.
• Hourly pay: Employee income varies, and roles may be less secure if tied to fluctuating business demands.

4. Employee benefits

• Salary pay: Salaried employees often have access to employer-sponsored benefits, including health insurance, retirement plans, and paid time off.
• Hourly pay: Hourly workers may receive fewer benefits or none at all, depending on the employer and employment type.

The chart below summarizes the key differences between salary and hourly pay at a glance, highlighting their impact on income, overtime, stability, and benefits.

Salary vs. hourly: Pros and cons for employers

When determining whether to offer salary or hourly pay, employers must weigh the advantages and disadvantages of each pay structure. Both approaches impact costs, workforce management, and employee satisfaction differently, depending on the nature of the role and the company’s operational needs.

Benefits of salary pay

• Predictable payroll processing: Salaried employees earn a fixed amount, simplifying payroll and aiding financial planning.
• Easier budgeting: Stable salary costs help businesses forecast expenses and allocate resources effectively.
• Increased employee retention: Offering a salary and benefits package can attract talent seeking stability and long-term growth.

Drawbacks of salary pay

• Higher costs for benefits and taxes: Salaried roles often include additional expenses like health insurance, paid time off, and retirement contributions.
• Limited flexibility in work hours: Salaried employees may not be required to track hours, which can lead to inefficiencies in workload management.
• Reduced overtime incentive: Employees on salary might feel less motivated to exceed their responsibilities since additional hours don’t lead to extra pay.

Benefits of hourly pay

• Cost-effective for variable workloads: Employers can adjust hours based on business needs, paying only for time worked.
• Increased accountability: Hourly workers are incentivized to perform during their paid hours, often improving efficiency.
• Lower benefits costs: Hourly roles may not require comprehensive benefits packages, reducing overall compensation costs.

Drawbacks of hourly pay

• Unpredictable payroll costs: Hourly wages can fluctuate based on hours worked, especially when overtime is involved.
• Higher turnover rates: Hourly workers may seek salaried positions with more stability and benefits, leading to higher recruitment and training costs.
• Increased overtime expenses: Regular overtime can significantly increase labor costs, particularly in industries with high demand.

By understanding these pros and cons, employers can make informed decisions that align with their operational goals and employee expectations. The choice between salary and hourly pay ultimately depends on the specific requirements of the role and the organization's broader objectives.

How to choose between salary and hourly

Selecting the right pay structure requires a careful evaluation of your business needs, the nature of the role, and compliance with labor laws. Employers should consider the following factors to make an informed decision:

1. Understand local and federal laws

Familiarize yourself with labor regulations, including the Fair Labor Standards Act (FLSA). Salaried employees must meet minimum earnings thresholds and job duty requirements to be classified as exempt. For hourly workers, ensure compliance with overtime pay laws and local minimum wage standards.

2. Consider the amount of work the role requires

Roles with consistent workloads and long-term responsibilities are better suited for salaried pay. In contrast, positions with variable hours or seasonal demands may align more effectively with hourly pay.

3. Research industry standards

Analyze how similar roles in your industry are compensated. Employees often compare pay structures when evaluating job offers, so aligning with industry norms can make your positions more competitive.

4. Determine what your company can afford

Evaluate your budget for wages, benefits, and taxes. Salaried roles typically include additional costs, such as healthcare and retirement plans, while hourly positions may lead to unpredictable payroll expenses due to overtime or fluctuating hours.

5. Assess employee expectations

Consider the preferences and expectations of potential hires. Professionals seeking stability and growth often prefer salaried positions, while those valuing flexibility may favor hourly pay.

Easily manage salary and hourly payroll with Rippling

Rippling simplifies payroll management for businesses with salaried and hourly employees. Rippling offers full-service payroll that allows you to do more with less—less money, less headcount, and less time. And all with a 100% error-free guarantee.

With Rippling, you can: 

• Pay employees and contractors in the same platform
•  Manage time and attendance natively 
• Run unlimited off-cycle pay runs at no extra cost 
• Set up multiple pay schedules, pay rates, and pay types in just a few clicks 
• Add recurring reimbursements (like cell phone payments, gym memberships, etc.) that are automatically paid out every pay period, monthly, or at whatever interval you choose
• Automatically calculate prorated pay runs for new or promoted employees 
• Manage all currency conversions, including payroll adjustments 
• Automatically calculate overtime for every country 
• Make changes after submitting payroll

Salary vs. hourly FAQs

Can you switch employees between salaried and hourly?

Yes, it is possible to switch employees between salaried and hourly pay, but the process must comply with labor laws. For example, salaried employees who are classified as exempt may need to be reclassified as non-exempt if their job duties change, making them eligible for overtime. It's essential to understand the legal requirements regarding exempt vs. non-exempt classifications before making the switch. Additionally, ensure that the employee’s pay rate aligns with applicable minimum wage and overtime laws when transitioning between pay types.

How does salary work?

Salary pay works by providing employees with a fixed, regular income, regardless of the number of hours worked. Compensation is paid weekly, biweekly, or monthly. Salaried employees usually hold exempt positions, meaning they are not entitled to overtime pay under the Fair Labor Standards Act (FLSA). Salary pay offers predictable income, which can appeal to employees seeking stability and long-term career growth. However, the pay does not change based on hours worked, so employees do not earn extra for working overtime.

What is an hourly rate?

An hourly rate is the amount an employee is paid for each hour worked. Unlike salaried employees, who receive a fixed salary regardless of hours worked, employees on an hourly pay structure earn wages based on the number of hours they put in. This rate can vary depending on the employee's job, industry, and experience. Hourly workers are typically compensated for overtime, earning a higher rate (often 1.5 times the regular rate) for any hours worked beyond the standard 40-hour workweek. The hourly rate provides flexibility and direct compensation based on time worked, which can benefit both employees and employers depending on the role's nature and business needs.

How can payroll software tools help manage hourly vs. salary employees?

Payroll software, like Rippling, can simplify the management of both salaried and hourly employees. It ensures accurate calculations of overtime, deductions, and tax compliance for hourly employees while processing fixed, consistent payments for salaried workers. Advanced payroll systems can automate time tracking and benefit allocations and help employers comply with state and federal regulations, making payroll management more efficient and reducing the risk of errors.

What are the cost implications of salary vs hourly pay?

Salaried employees may cost more in benefits, taxes, and administrative overhead, as they often receive health insurance, retirement plans, and paid time off. However, salary pay can help control payroll costs due to more predictable paychecks. Hourly employees may lead to fluctuating payroll costs, particularly when overtime is involved. While hourly positions allow more flexibility in controlling labor costs, the need to pay overtime can quickly increase overall compensation, especially during peak seasons or when employees regularly work beyond 40 hours.

Are there legal requirements for choosing salary or hourly pay?

Yes, there are legal considerations when choosing between salary or hourly pay. Under the Fair Labor Standards Act (FLSA), employees must be classified correctly as either exempt (salaried) or non-exempt (hourly). Exempt employees must meet specific criteria related to their job duties and minimum salary levels. On the other hand, non-exempt employees are entitled to overtime pay for hours worked beyond 40 in a workweek. It’s essential to adhere to these classifications to avoid potential legal issues.

How does overtime work for hourly vs salaried employees?

Overtime pay applies to hourly employees who work more than 40 hours per week. These workers are entitled to 1.5 times their regular hourly rate for overtime hours. In contrast, salaried employees classified as exempt are generally not eligible for overtime pay, regardless of how many hours they work. However, salaried employees classified as non-exempt may be eligible for overtime, similar to hourly workers. It’s crucial for employers to accurately classify employees based on their job duties to ensure compliance with overtime regulations.

What should employers consider when deciding between salary and hourly pay?

Employers should evaluate several factors when deciding between salary and hourly pay: the nature of the job, industry standards, budget constraints, and employee expectations. Salaried positions may be better for roles with stable, predictable workloads, while hourly pay suits positions requiring variable hours or frequent overtime. Employers should also consider the long-term cost implications, including benefits and potential overtime expenses, as well as compliance with local and federal labor laws. Understanding these elements ensures that the pay structure aligns with business goals and legal requirements.

Is salary or hourly better?

Whether salary or hourly is better depends on the employer and employee's needs. For businesses, salary pay offers predictable costs and stability, which is beneficial for roles with steady workloads. However, hourly pay can be more flexible, especially for jobs with fluctuating hours or seasonal demands. From the employee perspective, salaried roles are often preferred for their stability and benefits. Still, hourly positions may appeal to those who need more flexibility or want to earn extra through overtime. Ultimately, the decision should be based on the job's nature, industry standards, and business goals.

This blog is based on information available to Rippling as of November 21, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.