Salary vs. Hourly – What’s the Difference?

Derek Jones

Derek Jones

VP of Business Development, Deputy Americas

August 27, 2018

Salary vs. Hourly – What’s the Difference?

Derek Jones, VP of Business Development, Deputy Americas
August 27, 2018


The difference between salaried and hourly employees

The key difference between salaried and hourly employees is how they get compensated for their work. Employees who work on an hourly basis get paid for every hour that they perform their job and have the right to receive overtime pay if more than 40 hours is worked. On the other hand, salaried employees are not generally eligible for overtime pay.


Hourly employees

Hourly workers are paid a specified hourly rate that is multiplied by the number of hours worked over a particular pay period. Under the Fair Labor Standards Act (FLSA), all hourly workers are regarded as non-exempt employees. This means that hourly workers must be compensated at a rate of time and one-half for every hour worked over 40 hours in a week. Most hourly workers are promised a specified amount of hours per week. The exception is where the hourly worker is subject to a labor contract.

Salary vs Hourly - What's the Difference

The following criteria also indicate that an employee has an hourly position:

  • Paid for the hours that are worked.
  • The number of hours is set by the employer.
  • Most hourly employees work 40 hours per week.
  • Hourly employees who work less than 40 hours a week are classified as part-time workers.
  • Hourly employees must receive the minimum wage set by the state or federal government (whichever is higher).
  • Complete a timesheet or time card system to verify the hours worked.

Salaried employees

Salaried employees pay is calculated on an annual basis and is divided between specified pay periods, which are normally weekly or bi-weekly. The amount and regularity of pay is stated in a salaried employee’s contract. Some salaried employees are exempt employees under the FLSA rules. Most employers do not provide overtime pay for salaried employees. However, they may offer different benefits, like time off, as an alternative to overtime pay. If a salaried employee is considered to be a non-exempt worker, their employer must compensate them at time and one-half for hours worked over 40 hours in a week.

Salary vs Hourly - What's the Difference

The following also indicates that someone is a salaried employee:

  • Not required to complete a timesheet.
  • Salary remains the same whether a salaried employee works more or less than 40 hours, unless the employer has specified special circumstances
  • Jobs for salaried employees normally include benefits, like health insurance and 401(k).
  • There are generally more opportunities for job advancement with salaried positions.
  • Salaried employees may or may not be exempt from overtime.

Salary non-exempt vs. hourly employee

Employers are obliged to classify employees as exempt or non-exempt under the FLSA. Non-exempt employees come under the FLSA rules, regulations, and guidelines. However, exempt employees are not covered by the FLSA rules.
An exempt employee is someone who is excluded from overtime regulations, minimum wage, and other protections and rights that are available to non-exempt workers. In order for an employee to be classified as exempt, employers need to pay them a salary instead of an hourly wage.

The following three categories of exempt employees are recognized by the FLSA:

  • Executive – The primary duty of this employee is to manage the enterprise, a department or a sub-division of the enterprise and must direct the work of at least two employees. This employee must also have the power to hire or fire or have the ability to influence such decisions.
  • Professional – This employee’s main duty of work must involve knowledge of an advanced type of science or study in a highly specialized field such as computer analytics, engineering, and teaching.
  • Administrative – The key function of this employee is to carry out non-manual or office work directly associated with the general business or management of the employer or their customers.

Exempt employees are normally required to work the amount of hours that are needed to finish their tasks, irrespective of whether this means working 40 hours per week or more. There is no change in an exempt employee’s pay depending on the hours worked. In other words, their pay is not dependent on hours worked but on the job that is done. If the following criteria are met by administrative, executive, and professional employees, salespeople and STEM (Science, Technology, Engineering, and Math), they are not entitled to overtime pay:

  • Pay is salary-based as opposed to hourly.
  • Compensation is at least $455 per week.
  • A salary is paid for any week worked.

There are exceptions to the exempt employees and overtime requirements rule. If non-exempt employees earn less than $23,660 per year, they are guaranteed overtime pay. Exceptions to this rule are researchers and people working under a governmental or educational grant.

A non-exempt employee is not exempt from FLSA regulations, rules and requirements. Non-exempt employees need to receive the state or federal minimum wage (whichever rate is higher) and overtime pay at not less than one-and-a-half times their hourly pay in the event that they work more than 40 hours a week.


Salary vs. hourly pros and cons

The number one positive aspect of hourly work is that employees are assured of a definite amount of money for every hour they work. Another perk of hourly work is that employees get overtime pay if they work over 40 hours per week. Some employers offer more than the mandatory time-and-a-half pay rate for overtime. Therefore, an hourly employee can make double their hourly rate in some instances, for example, working during the holidays.

A downside to hourly work is that some employers do not permit their employees to work overtime. They are strict about enforcing the 40 hour a week rule. Therefore, an hourly employee’s ability to make extra money will depend on whether their employer provides overtime and whether extra hours are available. Another negative aspect of working on an hourly basis is that an employee’s paycheck can be different every pay period depending on the available hours.

Hourly employees, such as baristas and barbacks, also face uncertainty about the number of hours they are required to work and are sometimes given short notice about shift changes. However, the growth in predictive scheduling legislation provides more stability for hourly workers as employers are mandated to give a specified amount of notice of shifts and changes. Another drawback of being an hourly employee is that they are rarely entitled to the same benefits, retirement plans and bonuses as salaried employees. To help you understand these laws, Deputy created an eBook that covers these predictive scheduling laws by state and city. Keep your business on the right side of the law by downloading the link below:

Download Predictive Scheduling eBook
 

An advantage of being a salaried employee is that paychecks are steady without variations. If there are differences in pay, it is normally because of a bonus or extra entitlement. In general, salaried employees are paid at a higher rate than hourly employees. Additional benefits of salaried work are that employees receive employment perks such as larger bonuses, benefits packages, retirement plans, and more paid vacation.

One of the main disadvantages of working on a salaried basis is that the employee is not entitled to overtime pay (except for if the position has not met every requirement to be ‘exempt’ in relation to the FLSA). Salaried employees may have to work 65 hours a week or more to get their work done without being paid extra.


Salary vs. hourly law

There are some states that have increased the requirements for overtime eligibility and have their unique pay and hourly rate legislation. Therefore, employers need to check their state’s Department of Labor to ensure that they are complying with the applicable legislation.
It is usually the case that non-exempt employees are afforded more protection under federal law in comparison to exempt employees. The main laws that relate to the workplace involve the provision of a healthy and safe working environment, equal opportunities, federal child labor laws, and the Family and Medical Leave Act.

The FLSA oversees salary vs. hourly laws. The agency’s Wage and Hour Division oversees and enforces the Act. The Wage and Hour Divisions looks into employee complaints about issues such as:

  • Overtime pay.
  • Unfair employment practices.
  • Working hours.

Is salary taxed differently than hourly?

Both salaried and hourly employees are issued with an IRS Form W-2 once a year. This form contains the employee’s name, address, gross pay and taxes taken from their wages. Although the W-2 forms are referred to as W-2 hourly and W-2 salaried, the forms request identical information and the employer deducts tax from the hourly pay or salary.

As an employer, you pay tax according to the total amount on your payroll whether it is made up of salaried employees, hourly employees or both. Paying taxes for salaried employees is constant as you know how much your payroll will be for every pay period. You are able to have a more predictable financial projection and budget with salaried staff.


Convert salary to hourly

Employers may need to convert their employees’ salary into an hourly rate to determine how a salary compares to hourly pay. This conversion is also useful to work out how much you should pay in overtime.

The following are two formulas you can use to convert salary to hourly according to patriotsoftware.com:

The first formula is based on calculating the hourly rate in relation to a 40 hour week. Where your normal business workweek is less than 40 hours, substitute 40 hours with this number:

(annual salary ÷ 52) ÷ 40 = hourly rate
First, divide the employee’s annual salary by 52 weeks (the number of weeks in a year).
$31,200 ÷ 52 = $600 per week
Divide the weekly wages by 40 hours.
$600 ÷ 40 = $15 per hour
In this example, the employee’s hourly rate is $15.
The above formula is simple and most suitable for companies that do not pay a lot of overtime. However, using this formula could end up being costly if your employee works a lot of overtime hours.

The second formula to convert salary to hourly pay is based around the average number of hours your employees work on a weekly basis:

(salary ÷ 52) ÷ ((overtime hours × 1.5) + 40) = hourly rate
Let’s say your employee earns a salary of $31,200 per year and works an average of 45 hours per week.
To start, find the employee’s weekly salary. Divide the yearly salary by 52.
$31,200 ÷ 52 = $600 weekly salary
Next, figure out how many overtime hours the employee works each week. In this case, the employee works five overtime hours each week (45 – 40 = 5 hours).
Multiply the overtime hours by 1.5. This gives you the number of regular hours that is equivalent to the wages of the overtime hours.
5 × 1.5 = 7.5 hours
Add the regularly worked hours.
7.5 + 40 = 47.5 hours
Divide the employee’s weekly salary by the number of hours.
$600 ÷ 47.5 = $12.63 hourly rate
Using this second method, the employee’s hourly wage is $12.63.
The second formula is useful if an employee works overtime on a regular basis.


Salary vs. hourly calculator

If you do not want to make manual calculations to convert salary to hourly pay, you can make use of a calculator to automatically make this conversion. Salary vs. hourly calculators are useful for employers and for employees. A search for “salary vs. hourly calculator” will provide you with different options. Omnicalculator.com and calculators.org are examples of salary vs. hourly calculators.


Keep your business compliant

As an employer managing hourly employees, you need a solution that will provide accurate schedules to keep you compliant with relevant laws and save you money on payroll. Contact us for a demo to see how Deputy can help you to manage your hourly workforce more efficiently for maximum profit by scheduling a call with one of our reps below:


By using a solution like Deputy, your business can save money and time. Download this free ROI calculator and see savings on overtime, payroll processing, time theft, scheduling, and more.

DOWNLOAD ROI CACULATOR

Important Notice
The information contained in this article is general in nature and you should consider whether the information is appropriate to your needs. Legal and other matters referred to in this article are of a general nature only and are based on Deputy's interpretation of laws existing at the time and should not be relied on in place of professional advice. Deputy is not responsible for the content of any site owned by a third party that may be linked to this article and no warranty is made by us concerning the suitability, accuracy or timeliness of the content of any site that may be linked to this article. Deputy disclaims all liability (except for any liability which by law cannot be excluded) for any error, inaccuracy, or omission from the information contained in this article and any loss or damage suffered by any person directly or indirectly through relying on this information.


SHARE THIS POST
comments powered by Disqus
ABOUT THE AUTHOR
Derek Jones
Derek is the VP of Business Development in North America and has 16+ years’ experience in delivering data-driven sales and marketing strategies to SaaS companies.
Join 90,000+ business leaders by subscribing now
TRENDING ARTICLES

Never miss a beat!

Join 90,000+ business leaders by subscribing now