Salary Vs. Hourly - The Big Difference For Your Business
As a California business owner, you'll need to hire employees at some point if you haven't already. When you do, you'll have two ways that you can pay them: by offering a yearly salary or by offering an hourly wage. There are some major differences between offering a salary and offering an hourly wage, even if they end up being the same amount. It's important to understand what the differences are and how they will affect your business to determine what will suit your employment needs best.
When you pay an employee a salary, you must pay them the total amount of their salary over the course of a year. This means that their salary must be divided up and paid to the employee in weekly, bi-weekly, or monthly paychecks.
Hourly employees are paid at an established hourly wage. The hours they work must be tracked to ensure that they are paid for every hour worked. Part-time employees are usually paid an hourly wage. The total you pay, whether it's on a weekly, bi-weekly, or monthly basis, can vary based on how many hours the employee worked during that pay period.
The qualifications for an employee to be considered exempt are very specific. There are exemptions for different types of employees such as management, administrative exemptions, IT, sales and others. There are regulations regarding the amount they must be paid and the specific duties they must have. It is important to know these rules well when determining whether your employee qualifies to be exempt. If you aren’t sure or it is questionable, it is always safest to pay them as hourly.
Salary Vs. Hourly Law
There are both federal laws and California state laws to be aware of when paying employees annual salaries vs. hourly wages. First, make sure you're abiding by minimum wage laws. Additionally, both federal and state laws require employers to pay hourly workers overtime. Salaried employees are exempt from overtime, which means that although you can pay them overtime, in most cases you won't be required to by law.
Finally, if your company has 50 or more employees, you will be required to provide healthcare to employees who work at least 30 hours a week. Health insurance is not required for employees who work for less than 30 hours a week.
A more detailed breakdown of paying employees salaries vs. hourly wages follows:
Although the federal law mandates that you must pay hourly employees at least $7.25, California's minimum wage requirements are higher, although they vary based on how many employees you have. For example, if you have 25 employees or fewer, you're currently required to pay at least $11 an hour. If you have more than 25 employees, you're required to pay $12 an hour. The minimum wage in California is also set to increase by $1 every year until 2023, when it will be set at $15 an hour no matter how many employees you have.
Whereas federal law only considers overtime on a weekly basis, California defines overtime on a daily basis as well. Here is a breakdown of California's overtime requirements:
- You must pay time and a half for every hour worked past eight hours in a single workday.
- You must pay time and a half for every hour worked past 40 hours in a single workweek.
- You must pay time and a half for every hour worked on the seventh consecutive day in a single workweek.
- You must pay double time for every hour worked past 12 hours in a single workday.
- You must pay double time for every hour worked past eight hours on the seventh consecutive day in a single workweek.
Salaried employees are full-time workers. Generally speaking, an employee must be paid at least $23,660 to be paid on a salary basis.
Salaried employees are not required to be paid for overtime even if they work overtime hours. This is because the positions that salaried employees typically are higher level (such as management), meaning that they may have to put in extra work to perform the work required from them. Employers can choose to pay salaried employees overtime if they want to, but this rarely happens. Usually, salaried employees are rewarded for extra work through bonuses and other such incentives instead.
Now that you have a better understanding of the differences between salaried employees and hourly employees, let’s explore what the advantages of both are. We’ve compiled a few advantages to consider when choosing to hire an employee on a salary or on an hourly wage:
One of the big advantages for employees paid an hourly wage is that it's much easier for them to separate their work lives from their personal lives. They have more flexibility when it comes to scheduling a day off since they can request that their hours be moved around a little throughout the week. The opportunity to work overtime can also allow them to make more money.
For the employer, the duties and salary of the position dictate whether the employee qualifies to be exempt. There's some flexibility for employers as well since they can increase the hours an employee has to work if more work needs to be done, as well as decrease the hours an employee has to work if business is slow.
The main advantage of hiring a salaried employee is that they are required to do their job no matter how long it takes and you won't have to pay them overtime. Many professionals, such as managers, often put way more than 40 hours of work into a workweek.
While there are some clear advantages to both paying an employee a salary and paying them an hourly wage, there are also some drawbacks to both, including:
The biggest disadvantage to paying an employee an hourly wage is that you will have to pay them time and a half or double time if they work overtime. This entails being very careful with scheduling to avoid paying overtime.
Salaried employees typically expect a benefits package. It will be difficult to attract high-quality employees for salaried positions if you don't offer retirement benefits, such as a 401k plan. Salaried positions are also more challenging for workers since it can become more difficult for them to separate their work lives from their personal lives. A certain level of work is expected from them and they may have to perform overtime without being paid overtime.
Avoid Potential Pitfalls By Understanding the Difference
Knowing the differences between paying your employees salaries vs. hourly wages will make it easier to keep track of your hiring budget. Understanding the legal requirements that govern both is also important since failing compliance with California or federal state law can result in stiff penalties and severe fines.
Still a little confusing? Speak to a HR Specialist Today!