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Chances are, when you started your business, it wasn’t just for the money. That’s motivation, of course, but you may have wanted more flexibility and to do work that you genuinely enjoy. Your employees approach work in much the same way. The paycheck is just one of the reasons they work for you. When you’re considering the appropriate pay structure for your employees, it’s important to take into account other benefits you may offer, like health insurance and paid time off.
Whether you pay your employees a salary or an hourly wage is determined by the type of work that they do. If you pay them a salary to avoid having to pay them overtime, there’s a possibility that strategy may backfire. In some cases, salaried employees can be eligible for overtime. The advantages of salaried employment for your employees may outweigh the disadvantages of a salaried position, though. Whichever way you go, make sure you’re abiding by the legal requirements of your state and federal labor law.
What Is a Salaried Employee?
A salaried employee is an employee who is paid a set amount per year. For example, you may choose to pay a company executive or partner a salary of $100,000. Most salaried employees are also exempt, which means you are not required to pay them overtime if they work more than 40 hours per week, according to the Fair Labor Standards Act.
For a salaried employee to be exempt, you must pay the employee at least $23,600 per year, which is based on the federal minimum wage. In some states, the minimum wage is higher, and your salaried employees must be paid at least the same as minimum wage in your state. For example, In California, the minimum wage is $11 per hour. For an employee to be exempt from the requirement to be paid overtime pay in California, you must pay that employee at least $45,760.
Do salaried employees have to work 40 hours a week? That depends on your company and its culture. You may require your salaried employees to work a minimum of 40 hours each week, or you may require them to work as much or as little as they need to complete the work you require. It’s up to you and the needs of your company.
What Are the Benefits of Being a Salary Worker?
Being a salaried worker has its benefits. The main advantage is a predictable paycheck. Your employees don’t have to worry about being scheduled for fewer hours and having a smaller paycheck than they expected. Each paycheck will be the same.
Although there are exceptions, most salaried positions are full time, which means they are more likely to offer benefits. You may offer your salaried employees benefits such as vacation time, sick time and access to a retirement plan. You may or may not provide these benefits to your hourly workers as well.
What Are the Disadvantages of Being Paid a Salary?
The main disadvantage to being paid a salary for your employees is not having access to overtime. There may be times where you need your employees to work more than 40 hours per week, and you aren’t required to pay them overtime. Occasional long weeks may not bother your salaried workers, but consistent 50-hour weeks may eventually bother them. If your employees are consistently working long hours, you may want to consider redistributing their workload.
What Is an Hourly Employee?
An hourly employee is paid a set base amount for each hour worked. For example, if you pay an employee $12 per hour and that employee works 20 hours during the week, that employee will be paid $240 for that week. You set the schedule for hourly employees, and you may have full-time hourly employees, part-time hourly employees or both.
Full-time hourly employees may be required to be scheduled for a minimum number of hours based on your company policies. There may be a minimum of 32 hours per week or 35 hours per week, for example. This helps your company pay for the cost of the benefits you provide to your employees. It also gives these employees a sense of stability.
The only federal law that addresses full-time employment is the Affordable Care Act. Under the ACA, an employee is considered full time if that employee averages 130 hours per month or at least 30 hours per week. This only applies to applicable large employers, which is an employer with 50 full-time employees or more. These employers are required to provide at least a minimal amount of health insurance coverage.
What Are the Benefits of Being an Hourly Worker?
The main benefits of being an hourly worker are the protections most hourly workers have under federal law. For example, you must pay an hourly worker overtime pay if she works more than 40 hours per week. Per federal law, overtime pay is 1.5 times their regular hourly rate. For example, an hourly worker that you pay $12 per hour is paid $18 per hour for each hour worked over 40 hours. Some states, such as California, also require overtime if you work more than eight hours in a single day.
Your state may have different regulations regarding overtime pay, and you can opt to pay your employees more than the minimum overtime. For example, you may want to pay your employees double time if they work on a holiday, which gives them an incentive to work on a day they may not particularly want to.
Are lunch breaks required? Federal law does not require breaks for meals. State law typically does require breaks, though. For example, in California, you must provide workers with a 30-minute meal break if they work more than five hours. You don’t have to pay them for the meal break, though. If your employee is scheduled for six hours or less, he may agree to waive the required meal break.
Rest break requirements also vary by state. In Minnesota, for example, you must provide time to use the restroom at least once during every four hours your employee works. Other states require a 15-minute break for every four hours worked. Most states require that you pay employees for rest breaks that are less than 20 minutes.
If your business demand varies, you may benefit from the flexibility of hourly employees. You can schedule your employees according to the workload you anticipate. At a restaurant in a business district, for example, you may schedule more employees during lunchtime than dinner to accommodate business lunches.
What Are the Disadvantages of Being Paid Hourly?
The main disadvantage of being paid hourly from an employee’s perspective is that the pay can vary. If you schedule an employee for 20 hours one week and 25 hours another week, that difference in pay may make it more difficult for him to budget appropriately. Another disadvantage from the employee perspective is that part-time hourly employees may not be entitled to benefits such as paid time off and health insurance. Many companies do offer these benefits voluntarily, though, to increase employee retention and job satisfaction.
From the perspective of an employer, the main disadvantage of being paid hourly is ensuring you’re complying with all state and federal laws. You may want to use a computerized time clock system to ensure you’re paying your employees accurately, including the appropriate amount of overtime pay when required. If you don’t abide by state and federal laws, you may be subject to fines and penalties. You also may be vulnerable to lawsuits.
Understanding Exempt and Nonexempt Employees
Although you may not realize it, there’s more to the question of how to pay your employees than just considering the benefits of being salaried vs. hourly. Federal law exempts some employees from having to be paid overtime. These employees are referred to in the Fair Labor Standards Act as exempt employees.
Exempt employee qualifications require that an employee is paid at least $455 per week on a salaried basis. Your employee must also be an executive, an administrative employee, a learned professional, a creative professional, a computer employee or an outside sales professional. Computer employees can be paid on an hourly basis, with minimum pay of $27.63 per hour.
Each category of an exempt employee has its qualifications. An executive, for example, must oversee at least two full-time or full-time-equivalent employees and have the authority to make hiring decisions. An administrative employee must primarily do office or other non-manual work that supports your company. A learned professional must do intellectual work in science or education. A creative professional must do work that requires imagination, originality and talent in an artistic field. A computer employee can be a computer systems analyst, a software engineer, a computer programmer or someone who does similar work. An outside sales professional regularly engages in sales outside her workplace.
Paying Employees Who Receive Tips
If an employee receives more than $30 in tips per month, then that employee is a “tipped employee” under the FLSA. You are required to pay your tipped employees at least $2.13 per hour, or more if your state law requires it. Their hourly pay plus their tips must be at least equal to the federal minimum wage of $7.25 per hour.
Tipped employees are entitled to overtime pay. If a tipped employee is being paid the minimum of $2.13 per hour and works more than 40 hours, then that employee must be paid at least $3.20 per hour for each hour worked over 40 hours. Your employee is also entitled to tips earned while working overtime.
Understanding Overtime Requirements
Any business that engages in interstate commerce is required to follow federal regulations for overtime. If you have a small business, you may not think you fall into that category, but interstate commerce includes all aspects of your business, including the vendors you work with and the financial services companies you utilize. In other words, there’s a good chance you work with a company that’s based outside of your state, so it’s important that you comply with federal overtime laws.
Overtime pay also helps motivate your employees. It can be hard to work long shifts, and compensating your employees well improves morale and earns the loyalty of your workforce.
Deciding on a Pay Structure for Your Employees
The first step in deciding whether to pay your employees a salary or an hourly wage is to determine exactly what each of your employees will do. Although there is flexibility in most job descriptions, you should still have a clearly defined role and set of responsibilities for each staff member. Most positions will qualify as exempt or nonexempt based on their responsibilities. If you’re uncertain as to which category your employees fall into, you may want to consult a lawyer who specializes in employment law.
Job market expectations also determine the pay structure for your employees. Managers in some industries may expect and want a salary, for example, rather than an hourly wage. If you want to hire and retain the best candidates for your business, you should look at comparable positions with other companies to help determine an appropriate pay structure and pay range.
- Farnam Street: The Reasons We Work
- IRS: Identifying Full-time Employees
- IRS: Determining if an Employer is an Applicable Large Employer
- IRS: Employer Shared Responsibility Provisions
- CA.gov: Meal Periods
- Minnesota Department of Labor and Industry: Work Breaks, Rest Periods
- Overtime Pay | U.S. Department of Labor
- United States Department of Labor: Questions and Answers About the Fair Labor Standards Act (FLSA)
- United States Department of Labor: Fact Sheet #17A
- U.S. Department of Labor: Breaks and Meal Periods
- Fact Sheet #17G: Salary Basis Requirement and the Part 541 Exemptions Under the Fair Labor Standards Act (FLSA) | U.S. Department of Labor
- Hourly vs. salary: Which is better? ~ Get Rich Slowly
- Fundera: Wage Rules: How Much Should I Pay My Employees?
- United States Department of Labor: Fact Sheet #15: Tipped Employees Under the Fair Labor Standards Act (FLSA)
Melinda Hill Sineriz is a freelance writer with over a decade of experience. She specializes in business, personal finance, and career content. She has worked as an sales manager, hiring employees and helping them develop and enhance their skills. Learn more about her and her work at thatmelinda.com.