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Salary vs. Hourly Employment for a Small Business


Hiring employees is an exciting time for any business. Having enough work to employ an individual is a definite sign of growth. But deciding whether to pay employees an hourly wage or a yearly salary can be an issue for some. There are benefits to both payment options for a business and the employee. Overall, salaried employees are easier to track and manage than hourly employees. Every pay period is the same dollar amount for a salaried employee, while hourly employees will fluctuate based on sick time, overtime and vacation.

What is a Salaried Employee?

An employee who collects a salary has a predetermined annual wage that has been agreed upon between the business and the individual. This salary is yearly and is typically divided up into two monthly checks. Sometimes, these are contracted agreements that may only last for a short period, while others may last a few years. Salaries and their corresponding contracts differ in each industry. So, make sure to understand the standard wages of the industry you are a part of and it will help you make the right decision.

What is an Hourly Employee?

Hourly employees are paid based on an agreed-upon amount. This could be any amount depending on the field of work. Hourly workers must document their time; clock in when they begin working, clock out for lunch and clock out at the end of the workday. Businesses are required to have a system in place to protect themselves and the employee from errors. Depending on the state you are in, the minimum wage will differ; however, it is the same across all industries in each state. Hourly employees are paid for each hour they work, and overtime is often an appealing option for them. An exception to this rule is employees who are paid tips like waiters, their minimum wage tends to be lower than the overall state minimum wage.

How to Decide if an Employee Should be paid Hourly or by Salary

If your business requires more than 40 hours per week from your employees, a salary may be more beneficial to you. Depending on the state and federal overtime laws, you may be required to pay hourly employees time and a half their regular wage when they work overtime. This can get expensive if overtime is consistently available. Salaried employees are typically exempt from overtime pay and work the necessary hours needed to complete the job. If you have less than 40 hours of work per week, hiring an hourly employee may better suit your needs. Another consideration is the position of the employee. If you are recruiting for a critical position – management, accounting, payroll or HR – these roles are a better fit for salary. Salaried employees often play a more significant role in the company.

Make Sure You Pay Your Employees Adequately

You are required by law to pay employees adequately each pay period. There are federal and state laws in place to protect both parties. Salaried and hourly employees need to be adequately compensated to avoid any issues. Failure to do so can lead to escalated legal matters and HR involvement.

Finally, here is something to consider before hiring a new employee. In what capacity will you use this individual? Will they take on a vital role in the company, such as management, accounting, HR or CFO? If you answered, “Yes,” then you should consider a salary for these key positions. If the role you are filling is janitorial, general labor or an entry-level position, hourly will more likely be your best bet. Be cautious of over hiring though, even big businesses can find themselves laying off both salary and hourly employees when budgets tighten.

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