With emerging new businesses, hiring new employees is a must. However, even every existing business faces the question of whether their employees should be salaried or hourly.
Before digging into the matter, let’s take a detailed look at what are salaried and hourly employees, and their key differences.
What is a Salaried Employee?
A salaried employee is a worker who is paid a monthly or annual amount for his services in a company. This sum of money is called a salary and is divided between the pay periods. Most times, salaried employees are also given an employment contract. In simple words, they do not get paid based on their hours worked, but on an overall decided salary. Therefore, if a salaried employee works more or less than the standard 40-hours per work week, it will not be documented by the employer.
Another noticeable difference is that salaried employees do not have to track their clock-in and clock-out timings and hence do not need to fill out any timesheet. Salaried jobs offer more security in most industries. Salaried workers often have opportunities for advancement into higher-paying management positions. Another factor about salaried employees is that they may or may not be exempted from overtime, which is essentially the extra pay for extra hours worked. These employees receive more benefits than hourly employees.
What is an Hourly Employee?
An hourly employee is paid a decided amount by the hour. Hourly employees may or may not have a contract and are only paid for their hours worked. The employer determines the number of hours each hourly employee has to commit each week or month, depending on their scheduling system. Hourly employees must document their working hours through the use of a punch-card system or by completing a timesheet, which is then verified by the employer.
There is not much legal requirements for hourly employees and their hours assigned each week is flexible. They receive different pay rates and benefits as compared to salaried employees. On average, most hourly employees work for 40 hours a week, and individuals who work less than 40 hours a week are generally classified as part-timers.
Pros of Paying Employees a Salary
- Budgeting. Salaried employees almost earn a predictable or set wage. Which means that employer mostly has to pay the same money or amount at every pay period. This turns out as a significant benefit to the employer in the sense that he or she can budget the payroll for the year in advance, which is an important business practice.
- Payroll. As the employees get a specific sum of money for every pay period, this makes the business payroll expense consistent as well as easy to manage.
- Employees have a good feeling. The salary may make employees feel like they have more worth and prestige. As the people who have stable jobs, or in other words, get regular salary are preferred on those who work on an hourly basis. Similarly, the salaried employees may be more loyal to the business because they may consider themselves as part of their companies.
- No need for tracking. The employer also does not have to worry about tracking time that the employees take for breaks as the working hours are already set.
- Easy paid time off calculations. Hiring salaried employees also makes paying for a vacation, and sick leaves easier as well, as you can pay these either at a daily or weekly rate instead of an hourly rate depending upon the days, the employee took off.
- No worries about paying overtime. The employees are paid for the job or the results of their work, rather than the time they put into doing the job. So, the employer doesn’t need to worry about calculating or paying overtime if the employee has to work extra to meet a deadline.
Cons of Paying Employees a Salary
- Non-Exempt salaried employees. There are two categories of salaried employees, non-exempt and exempt. The most noticeable hole in adopting a salary system is to pay non-exempt employees a salary because the employer still has to calculate the number of hours the employee worked as well as track their paid breaks, unpaid lunch and overtime hours, etc. Their salaries are based on decided hours that are already agreed. So, if the employee works more than scheduled hours, the employer has to add those additional hours as paid hours.
- Irrespective of workload. Another significant hitch of paying a salary, or agreeing to pay an employee a salary, is that the employer is obliged to pay them the decided sum of money, even if the business is not busy or don’t have any work that week or month or on a day. On the other hand, if employees are to be paid hourly, the employer will only have to pay them for hours they worked.
Pros of Paying Employees Hourly
- Efficient paying system. The most noticeable and most prominent benefit of paying workers hourly is that the employer only pays employees for hours worked. So, if the business is busy, have lots of work or a busy season with lots of customers, your larger payroll will likely be offset by increased business income. On the other side, if the business is slow and has less work, and when fewer work hours are needed, then the employer will only have to pay them for the time they worked for.
- Savings on Benefits. If the employer hires employees on an hourly basis, then he or she may not be required to give certain benefits to these employees. Employees working less than 130 hours per month generally are not eligible for certain benefits and salaried ones. That means the business can save on the cost of providing health insurance, paid time off, and other benefits.
Cons of Paying Employees Hourly
- Tracking of hours. The biggest shortcoming of paying employees on an hourly basis is that the employer has to track the hours the employee worked for and this takes time as it requires someone to check the hours reported on time cards to make sure there is no time theft and look after all the calculations.
At the end of the day, consider the nature of the work and projects that your business has to handle before deciding whether an employee should be salaried or hourly.