If you’re a small business owner, deciding on a compensation method for different positions can be tricky. There are a number of important factors to take into consideration when deciding how you’re going to pay your employees. Obviously, you want to minimize paying overtime when possible, but in some instances, it’s better to pay your employees hourly rather than a salary. Read on to learn more about the differences between hourly and salaried pay and the benefits of each:

Exempt vs. non-exempt

According to the Fair Labor Standards Act, a non-exempt employee must be paid minimum wage and overtime pay for any time worked over 40 hours a week. Under FLSA rules, non-exempt employees are entitled to time and a half of their regular pay for each hour of overtime they work. Non-exempt employees are usually paid hourly, although there are cases in which non-exempt employees are paid a salary.

Exempt employees, on the other hand, are not entitled to overtime pay. Some types of jobs are considered exempt by law, such as outside sales staff and airline employees. For most professions, however, an individual is an exempt employee if he or she meets the following three criteria:

  • He or she is paid at least $23,600 per year (or $455 per week)
  • He or she is paid on a salary basis
  • He or she performs exempt job duties

Exempt job duties include any tasks that are relatively high level with respect to the company’s overall operations, regardless of job title. The FLSA breaks this into three main categories: executive, professional and administrative.

Hourly employees

An hourly employee’s pay is based on an hourly amount. Hourly employees typically don’t have a contract and are only paid for the hours they actually work. The employer determines the hours for an hourly employee each week. Hourly employees are required to document their work each week by tracking the number of hours they worked on a time sheet that will then be verified by a supervisor.

There’s no requirement for how many hours an hourly employee must work during a full week. Employees who work less than 35-40 hours per week are considered part-time and may have different pay rates, benefits and paid time off than full-time hourly employees.

Salaried employees

A salaried employee is paid based on a set annual amount, known as a salary. This salary is divided into pay periods throughout the year, and the employer determines the frequency of the pay periods. Salaries are based on a 2,080-hour year. Salaried employees are often given an employment contract. Although salaried employees aren’t required to document their time on a time sheet, some companies still require that employees still track their time. However, this time tracking cannot be used to alter a salaried employee’s pay. Salaried employees get paid not for the hours they work but on their salary, regardless of whether they work more or less than a normal 40-hour work week.

What is standard in your industry?

If you’re not sure if you should pay your employees hourly or salaried, look at how other companies in your industry pay their employees. Some industries have typical methods of compensation for certain job classifications. For example, managers are often salaried because they are not performing labor but rather taking on a role to help manage the direction of the company. On the other hand, IT technicians are often hourly because they work based on need and perform physical labor.

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