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One of the most challenging aspects of running a small business is paying your employees. Not only do you have to determine how much to pay your staff, you also need to decide if you will give them salary or hourly wages.

The terms “salaried” and “hourly” refer to how employees get paid. The distinction between the two is based on the type of work your employees do and their status as exempt or not exempt from overtime. In fact, overtime is one of the most critical considerations in determining how small businesses pay their staff.

 

Nonexempt vs. Exempt Employees

Most jobs in the United States are governed by the Fair Labor Standards Act (FLSA), which establishes labor regulations to protect workers against unfair work and pay practices. There are two FLSA employee classifications: nonexempt and exempt.

Nonexempt employees are not exempt from FLSA overtime and minimum wage rules. Nonexempt status means that you must pay your nonexempt employees a minimum wage and overtime at time and a half after 40 hours of work in a single week.

Exempt employees are exempt from overtime and minimum wage rules. In other words, they do not receive overtime pay. Exempt employees must earn a salary, and, according to current laws, an employee has to make at least $455 a week ($23,660 a year) to be considered exempt. Exempt employees must also perform job functions that are classified as exempt, which generally include executive, administrative, or professional duties.

Individual states may have additional wage and hour requirements that must be adhered to, and state and federal laws governing employee classification are subject to change.

Salary vs. Hourly Wages

Simply put, a salaried employee receives a salary and an hourly employee receives pay based on an hourly rate. An employee’s salary is an annual amount based on a 2080-hour year, divided between a company’s established pay periods. Salaried employees generally are not required to sign a time sheet or otherwise account for their time.

Employers determine weekly schedules for hourly employees and are not required to assign a specific number of hours each week. However, employees who you designate as part-time may have different pay rates, benefits, and paid time off than full-time hourly employees. Because hourly employees are only paid for hours worked, they must document their time and have it verified by their employer.

Determining How to Pay Your Staff

Small business owners need to consider multiple factors when determining whether an employee should be salaried or hourly. For example, you can begin with the economics of your industry and consider standard practices for how workers are paid. The specific tasks of each job will also be a key factor. Professionals including lawyers, doctors, teachers, accountants, engineers, and pharmacists are typically salaried. Retail and restaurant employees are normally paid on an hourly basis.

Here are some additional factors to consider: 

Salary:

  • Salaried employees earn predictable wages. This goes a long way towards helping businesses maintain a stable, skilled work force and makes personal budgeting easier for employees.
  • Many people associate a salary with having greater job status. Although this is not necessarily true, employees who feel valued tend to be more loyal and productive.
  • If an exempt salaried employee works over 40 hours in a week, you do not have to pay them overtime wages. This can be beneficial to your bottom line.
  • Salaried employees may be eligible for overtime if their average weekly pay is less than the minimum set by the Department of Labor.
  • If you pay a salary to nonexempt employees, you need to pay overtime wages when necessary. Paying hourly wages to nonexempt employees might be easier than calculating overtime for salaried employees.
  • Employers often expect salaried employees to work after hours or extra hours without pay, which can have a negative impact on morale. If you have hardworking staff that consistently put in long hours, consider increasing their salaries.

Hourly:

  • If your business is seasonal or you regularly shift staffing levels up and down, it makes more sense to pay an hourly wage.
  • To cut spending or manage payroll costs, you can reduce the schedules of your hourly workers. However, keep in mind that fewer hours means the loss of valuable income for your staff.
  • If you want an hourly employee to work more, you have to pay them. If they put in overtime hours, it will cost you even more.
  • The fluctuating demands of your business can result in unpredictable work schedules for your hourly employees. This may lead to a lack of job satisfaction and increased turnover.

FLSA regulations are complicated, and it’s not uncommon for businesses of all types and sizes to encounter issues, even when they are making every effort to do right by their staff. If you are unsure how to pay employees correctly, enlist the help of an expert such as an employment law attorney, CPA, or HR professional. They will review your jobs and workers, evaluate the conditions of their employment, and help ensure they are properly classified and paid.

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