Sarah Sarah Ling
6 min read, December 2021

A key question that often arises in the human resource management of an organization is the type of compensation package for the employees. Company owners are often skeptical about which type of remuneration would be better for their businesses; Hourly vs salary employee. It may sound like a simple question, but the answer is a little complicated.

The type of compensation package you offer and give to your employees is a key factor for retaining and attracting superior talent and skills to your company. Experienced individuals with specialized expertise often pull away from being paid hourly wages. That is why salary is better than hourly in some scenarios. On the other hand, paying all your employees a structured salary might burden your company’s existing financial health. In the long-run, detrimental financial condition will also be bad for the employees and adversely impact their job security. So, what is the right way to go? Hourly vs salaried employees, which should be your choice for your company?

Both the options have their own pros and cons. You need to understand the two types with greater insight you make the right decision for your company.

Salary Vs Hourly Employees: A Comparison

Salaried Employee

A salaried employee gets paid a specific amount of money at regular intervals (mostly monthly) for his services to a company. The amount called salary is mutually agreed upon before formally accepting a job offer. In most parts of the world, this salary is based on an average 40-hour workweek. However, even if the employee works more or lesser than 40 hours a week, he or she is entitled to be paid the same amount of money by the company. In a salaried remuneration package, there is no liability to pay overtime.

Advantages of Salaried Employees
  • Salaried employees are paid a fixed amount of money at a specific time period. Even if they work more than their designated time in a day or a week the company does not have to pay for overtime.
  • Much cost-effective for bigger and well established companies.
  • Without the concept of overtime, the company can offer employees flexible work hours, an attractive perk for many individuals. A great way to manage these flexible work schedules is through time tracking tools like Timesheet.
  • With salaried employees, the accounting matters and payroll systems are more streamlined and efficient.
  • With fewer chances of fluctuations, the business finances, especially cash flows are much more stable and predictable.
Disadvantages of Salaried Vs Hourly Employees
  • With fixed or flat salary packages, employees feel less constrained to work for 40 hours a week. This may lead to shirking work because they know they will be paid the same amount even if they work less. You can overcome this problem by using an employee time tracking and productivity digital tool called Timesheet.
  • In many companies, there are no time-keeping mechanisms to monitor an employee’s in and out movements. This creates loopholes for employees to come in late and leave early without being formally noticed. Timesheet can help overcome these issues with great ease.
  • In small companies, especially start-ups, the business is less, and hence full-time employees are under-utilized during the day. Despite lesser work, you have to pay them the same amount of money.
  • Companies that have seasonal business activities, often face the same problems. With sluggish sales in some months, the workload on employees is very little. However, during peak seasons they have to work more.
  • Paying all employees fixed amounts irrespective of their job nature and duties, the financial condition of the company will be strained.
Hourly Employee

An hourly employee is paid according to the number of hours he or she works in an organization. The rate of payment is decided before the job acceptance offer and is ascertained mutually, as a per hour wage. The hourly wages are often governed by some legal laws or labor codes of the jurisdiction of the company’s operations. Depending on your location, you will be paid a minimum wage rate applicable to the first 40 hours of a week. Any time exceeding this limit will make you eligible for overtime pay. Payments will be made periodically as per company policy but amounts will vary according to the working hours of the employees.

Advantages of Hourly Vs Salaried Employees
  • Being an hourly employee, the individual will not be eligible for any permanent employee benefits or perks like healthcare or retirement plans.
  • Organizations can schedule their working operations according to their business requirements. In peak seasons, the company can hire more employees and engage them for longer periods. During sluggish timings, vice versa can happen. The best way to create a time tracking mechanism is through affordable and reliable software called Timesheet.
  • They are more cost-efficient because you do not have to pay employees a fixed amount irrespective of the productivity they offer your company.
Disadvantages of Hourly Employees
  • Hourly wages are eligible for overtime payments which can increase your cost burden.
  • Tracking their hours of work can be difficult and challenging for a company.
  • Employees lack the consistency of efforts and are less motivated to be loyal to your company.
  • To track their activities, an organization requires to invest in a good and effective time tracking system.
  • The employee payments and payroll system is fluctuating and create problems in forecasting cash flow needs.

Laws, Exempted and Non-Exempted Employees

Before you decide between hourly vs salaried employees for your organization you need to consider the wage and employee laws applicable to your company’s jurisdiction. In US, the companies making annual sales of over $500,000 and involved in interstate commerce are governed by the Fair Labor Standards Act. The law specifies a minimum wage rate and rules for overtime payment for part-time employees. Any company or employee who is non-exempted from this act, should first go through the rules and regulation carefully before deciding on what type of compensation to offer its employees. Exempted workers include domestic workers, family members of agricultural business owners, and executive, administrative, or professional employees. Things to Consider While Selecting Salaried Vs Hourly Employees When an organization is determining which type of employees or remuneration structure is suitable for their business operations, the following factors should be considered.

  • Nature of business of a company. (Seasonal or Consistent)
  • Size of the organization (startup or well-established company)
  • Financial aspects and human resource budget
  • The job responsibilities of the specific employee
  • Applicable state laws and regulations
  • Benefits and perks you are willing to offer your employees
  • Type of employees you want to attract to your organization

Final Thoughts

Which is better? Why is salary better than hourly? Or is hourly a smarter choice in hourly vs salary employee? We have presented to you the insights, the pros, and cons of the two types of employees. We have also listed down the factors that influence your decision as a company owner or human resource manager.

After going through these details, it can be safely concluded, that there is no right and wrong answer for this question. Your final decision should be an outcome of a careful analysis of what’s best suited for your specific business requirements.

In the end, the things that matter the most should be the growth and successful future of your company and the motivation of your employees. Happier employees and satisfied managers lead to smooth business operations in both the long and short term.

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