Salary vs. Hourly: Breaking Down Compensation Models

If you're trying to determine whether offering your employees hourly pay or salary is more beneficial, it's important to consider the advantages and disadvantages of both compensation methods. Hourly employees are compensated for the specific hours they work, which is ideal for businesses that require in-person attendance. Retail, food service and hospitality industries often choose to pay their employees on an hourly basis.

Salary vs. Hourly Breaking Down Compensation Models

Salaried employees receive a certain amount of monetary compensation for the year. Then, that yearly compensation is divided according to the pay periods. Managers, tech employees, and work-from-home employees are examples of employees who are typically paid a salary. 

Let’s take a look at salary vs. hourly compensation so that you can make an informed decision about which is best for your company and employees.

Salary VS. Hourly Compensation

Salaried employees are paid a set amount of money per year regardless of how many hours they actually work. Hourly employees are paid a certain amount of money per hour that they work.

Salary Compensation

Salaried employees must be paid a minimum amount of money per week. As of January 1, 2020, salaried employees must be paid at least $684 per week, which is $35,568 per year. On August 30, 2023, the Department of Labor proposed raising the minimum salary requirements for certain salaried employees under the Fair Labor Standards Act, including plans for regular updates based on current earnings data. 

These employees are exempt, meaning if they work more than 40 hours a week, they are not entitled to overtime pay except under specific circumstances, usually because the employee’s job doesn’t meet the job duties test.

Pros of Salaried Employees

Employees like receiving a salary because:

  • Salaried employees receive a regular paycheck that is a set amount.
  • They typically receive paid time off for sick days and vacation.
  • These employees typically receive benefits, like health insurance and retirement accounts.

Employers prefer paying a salary because:

  • The business doesn't necessarily have to calculate overtime or holiday pay, which can be incredibly complicated.
  • If all employees are salary, it creates a stable payroll that can be predicted from week to week and month to month.
  • Offering salaries can attract highly skilled and senior-level employees.

Cons of Salaried Employees

Employees may hesitate when salaried pay is offered because:

  • They won't receive any overtime pay if they work more than 40 hours a week.
  • They have minimal control over their schedules.
  • They may be required to work on weekends, holidays, and on-call.

Employers may hesitate to implement salaries because:

  • Payroll cannot be decreased by reducing a salaried employee’s hours.
  • It can be difficult to determine if a salaried employee might be non-exempt and therefore entitled to overtime pay.

Hourly Compensation

Hourly employees are paid by the hour and must be paid at least minimum wage for every hour they work. This could be the federal minimum wage of $7.25 an hour or a state minimum wage.

Employees, who are paid by the hour, may or may not receive any additional benefits, like health insurance or retirement accounts, but if they work overtime, they are entitled to time and a half. For example, if an employee works 50 hours a week and makes $15 an hour. They would receive $600 for their regular pay and an additional $225 for the 10 overtime hours. If an hourly employee receives a lot of overtime, they could make more money than if they were in a comparable salaried position.

Pros of Hourly Compensation

Employees may prefer hourly pay because:

  • They receive their hourly rate for every hour they work.
  • They are eligible for overtime pay.
  • They have more control over the hours and days that they work.
  • Hourly employees typically have a better work-life balance.

Employers may prefer hourly employees because:

  • If the company needs to reduce costs, management can tell employees to take the day off or reduce employee hours.
  • If business is slow, they can send hourly employees home early and save on payroll costs.

Cons of Hourly Compensation

Employees may be hesitant to accept hourly work because:

  • Hourly employee schedules may change dramatically from week to week, resulting in fluctuating paychecks that make it difficult to create financial plans.
  • Hourly positions may not come with additional benefits, like health insurance.
  • The employee won’t get paid for absences or when they are late.

Employers may dislike hourly pay because:

  • Their payroll may fluctuate greatly for each pay period.
  • Hourly employees don’t tend to stay in their positions as long as salaried employees, resulting in higher turnover.
  • Employers may have difficulty calculating overtime pay and paying employees for all the time they worked, resulting in payroll errors.

Choosing Hourly Vs. Salary

As a business owner, you may have difficulty in determining whether hourly or salary pay would be better for your employees and your company. If you’re trying to decide, the first step might be figuring out our hourly rates.

Michigan requires employers to pay their hourly workers at least $10.10 per hour if they’re 18 years old or older. Salaried employees must be paid a minimum of $35,568 or $17.10 an hour. This means that an hourly employee would need to work 3.69 hours of overtime each day to match the rate of a salaried employee.

Of course, pay isn’t the only criterion. In order to be considered a salaried and exempt employee, the employee must work independently at least 50 percent of the time. The positions must also meet specific criteria or tests to determine if the employee is exempt from overtime pay.

For example, in order for an administrative employee to be considered exempt, he or she must:

  • Receive at least $684 per week.
  • Perform non-manual work most of the time.
  • Exercise independent judgment and discretion as a primary duty of their position.

If the employee’s job doesn’t meet the criteria, you’ll need to pay them an hourly rate. Therefore, it’s essential to evaluate each position in order to determine which type of compensation to offer.

Payroll Help with Workforce PayHub 

If you’re looking for an easier way to manage your employee compensation, check out Workforce PayHub’s payroll services for Michigan businesses. We offer the ability to manage your own payroll from anywhere or outsource your payroll processing to us, and we’ll do all the complex work.

To learn more about our payroll solutions and how they can help you enhance accuracy and ensure timely pay, contact us at 517-759-4026. If you’re ready to improve your payroll processes, request a quote today.

Eric Jones
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