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The difference between salaried and hourly employees

Your job category determines everything from how you get paid to whether you can earn overtime

Illustration courtesy of iStock

Knowing the difference between salaried and hourly employees is about more than simply understanding how workers are paid. The employment category somebody falls into also determines which labor laws apply to them and whether they’re compensated for any overtime hours they’ve worked.

Salaried employees earn the same amount each month, but that may mean working extra hours when the responsibilities of the job require it. Hourly employees are paid based on how many hours they work, but they can earn overtime and bonus pay for any time worked beyond the usual 40-hour workweek.

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In this article, we’ll look at some of the key differences between these two types of workers, and also list some of the pros and cons of being a salaried employee versus an hourly one.

What does being a salaried employee mean?

A salaried employee is an employee who is paid a fixed income, regardless of how many hours they work. A salary is a gross amount paid to the employee annually, rather than an hourly rate, that is paid in installments throughout the year, typically monthly or every two weeks. 

Salaried employees almost always work in full-time roles, and are more likely to receive company benefits than their hourly counterparts. These benefits may include health insurance, paid time off (PTO), access to dedicated desk space, and employer-matched contributions to a 401(k) plan. Salaried employees are considered “exempt,” meaning that unless an employer chooses to offer it, they aren’t paid for any overtime hours they work.

Benefits of being on salary

Health insurance

Salaried employees are far more likely to receive employee benefits, including health and dental insurance for themselves and their families. 

Parental leave

The benefits of paid parental leave are multifold, which is why more and more states are mandating that an employer must offer some level of financial support to workers who take time off to care for a new child.

401(k) plans

Many companies offer a 401(k) plan or other employer-sponsored retirement plans to their salaried employees, allowing workers to make regular pre-tax contributions to their retirement savings, directly from their paychecks—and often, with additional contributions coming from their employer.  

More stability

A salary is a fixed income payable at regular intervals, which means that an employee can budget for their future, knowing that they’ll continue to receive the same amount of money each time they’re paid. This stability doesn’t just make financial planning easier, but it also helps a worker if they choose to apply for loans or mortgages too.

Clear career path

Salaried employees are usually perceived as having a higher status and more accountability at a company than their hourly counterparts, even when working in the same roles. This opens up opportunities for pay raises and promotions that an hourly employee would find it harder to obtain.

Disadvantages of being on salary

Extra hours are usually unpaid

The average salaried employee works 9.2 hours of unpaid overtime every week, according to a study by ADP Research Institute. This “hidden overtime” has sharply increased since the pandemic began. With more employees working from home, their workdays often creep into their personal time.

More responsibilities

Working full-time for a company generally comes with a bigger workload and a greater personal commitment to the long-term health of the business. For example, salaried employees may be expected to work longer hours to ensure objectives are met when a project deadline looms.

Poor work-life balance

While salaried employees are more likely to get paid time off (PTO), they’re less likely to be able to fully disconnect from the job. They may have to take their work home with them, or be available to work at inconvenient times and on short notice. Unhealthy work environments can also foster a culture of working late among salaried employees.

Difficult salary renegotiation

Depending on the company and the industry, a salaried employee at the top of their salary range could find it difficult to negotiate a raise. Whereas an hourly employee might take on more work to earn more money, salaried employees in low-demand areas could find themselves pushing against a pay ceiling.

What does being an hourly employee mean?

An hourly employee is an employee who gets paid a wage based on the actual number of hours they work, as opposed to a salaried employee who receives a fixed weekly or monthly salary. For example, an hourly employee who works 30 hours in a week will be paid 30 times their hourly rate. 

Hourly employees are considered “nonexempt,” meaning that if an hourly employee is asked to work overtime, they’ll be paid for those additional hours, too. Hourly employees are typically entitled to time and a half for any hours worked over 40 hours per week.

This means that an hourly employee’s pay fluctuates a lot depending on the schedule set for them by their employer. An hourly employee may also be required to use a timesheet or other clocking-in system to log their total payable hours worked in a given period.

Hourly employee benefits

Compensation for extra hours

Because an hourly employee is paid for precisely the number of hours they’ve worked in a given period, any additional hours of service they provide are logged and fully compensated. Employers must also start paying hourly employees one and a half times their hourly rate once they’ve worked more than 40 hours in a week.

Freedom to choose where you work

When hourly employees are contractors or freelancers, they’re often free to decide whether they would prefer to either work remotely or use the company’s office space as they wish.

Better work-life balance

Generally speaking, once an hourly employee has completed their scheduled hours, they’re no longer considered to be as accountable to the employer as a salaried employee. They’re also typically free to work fewer hours to make more time for other interests, such as spending time with family, pursuing hobbies, or launching their own venture.

You can have more than one job

Hourly employees aren’t tied to a single employer, and can offer their services to as many companies as they can make time for. This gives them a wider breadth of experience, a larger network of contacts, and a degree of income security, as the risk of losing income is spread across multiple employers.

Disadvantages of hourly employees

Poor stability

Working as an hourly employee is inherently more precarious. Not only does income fluctuate depending on the hours worked, but in periods of economic downturn, employers are more likely to reduce the number of hours offered to part-time workers—or to dismiss their hourly employees completely—before laying off salaried employees.

Difficult career path

Hourly positions are more commonly found near the bottom of the company hierarchy, making it difficult for an hourly employee to advance within a company. Management roles are typically full-time positions, so salaried employees have an advantage over hourly employees when it comes to career progression.

No extra benefits like health insurance, etc.

Depending on the company and the state, hourly employees are less likely to be offered benefits such as health insurance and paid time off. There are cases where hourly employees who are full-time equivalent—that is, working a full 40-hour week—may be offered the same benefits as a salaried employee, but often this is at the employer’s discretion. When hourly employees are offered some level of healthcare (for instance, if they work enough hours for a company), they may be expected to contribute a larger portion of their paychecks toward insurance premiums than salaried employees.

Calculate pay for salary vs. hourly

Employers can compare an hourly (or part-time) employee with a salaried (or full-time) employee by first converting the hourly worker into their full-time equivalent (FTE). 

An FTE is a unit that measures how many salaried employees one or more part-time workers adds up to. For example, an hourly employee working half as many hours as a full-time worker has an FTE of 0.5. Tracking workers by this simple metric is incredibly useful for understanding labor costs, planning for new hires, and determining compensation.

For employees, there’s a simple way to quickly convert an annual salary to an hourly rate. Divide your gross income by 52, the number of weeks in a year, and again by the number of working hours in a week. To convert from an hourly rate to a salary, you reverse the process, multiplying your rate by the hours worked and then by 52.

This calculator doesn’t account for overtime rates or the fringe benefits, including PTO, that are offered by salaried employment, which all impact the final figure and make it tricky to make a clear-cut comparison between salary and hourly pay.

Deciding what type of payment you prefer

Understanding the advantages and disadvantages of both hourly pay and salaried employment can help people make better decisions about the type of work that best suits their needs. Working hourly can offer greater flexibility and choice over when, where, and how much you work, while salaried employment brings with it more benefits, greater stability, and the option for career progression.

For employers, knowing the differences between hourly and salaried workers is key to making sure employees are being compensated correctly and that work is being allocated properly across teams. Moreover, having flexible employees who work hourly gives companies the agility they need to reach their goals in a challenging business landscape.

Steve Hogarty is a writer and journalist based in London. He is the travel editor of City AM newspaper and the deputy editor of City AM Magazine, where his work focuses on technology, travel, and entertainment.

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