Navigating employee classification can be a challenge for any employer, especially when exempt vs. nonexempt status, overtime regulations, minimum wage laws, and other factors enter the equation. Paired with these concerns are questions about the differences between hourly employees and salaried employees, how the Department of Labor defines them, and the pros and cons of different employee categories for businesses across different industries.
In this article, we’ll define the differences between hourly and salaried employees, offer clear guidelines regarding overtime regulations for each, and explore the pros and cons of being an exempt, non-exempt, hourly, or salaried employee.
What is an Hourly Employee?
Unlike a salaried employee, an hourly employee is paid exclusively (and exactly) for the time they work during a given pay period. Because their work hours may vary, their gross pay is often different from paycheck to paycheck, though their hourly rate is consistent and predetermined.
Employers must apply hourly wage rates consistently and in alignment with company, state, and Department of Labor standards to ensure that each employee is paid accurately based on a pre-established job category, title, or job description, and not based on a manager’s independent determination. Employees with the same job title or job description must be paid the same way: as either hourly or salaried employees.
Employers set the number of hours each employee will work weekly, and must provide access to a timecard or timesheet system for employees to submit information regarding hours worked. For both employers and employees, the time tracking process is streamlined and simplified with the use of a digital, self-service time and attendance system that can be easily integrated with payroll, benefits administration, and other HR processes.
All employees receiving hourly wages are entitled to receive the minimum wage that applies to their jurisdiction, whether it’s the federal or state standard (whichever is higher). The Department of Labor provides an interactive map with minimum wage rates by state.
Example of an Hourly Employee
Each hourly employee is paid minimum wage or more for each hour they work, beginning at the federal minimum wage standard of $7.25 per hour among non-exempt employees. So, if an employee’s pay rate is $15 an hour and they work 40 hours per workweek, they will receive $600 in gross pay per week. If an employee works 5 additional hours of overtime in that same week, they will receive an additional $112.50 in pay ($22.50 per hour x 5 hours, accounting for time and a half overtime pay).
The most common hourly employee types include administrative assistants, sales representatives, auto technicians, customer service representatives, construction laborers, and food and restaurant employees. Among all of these categories, servers in the food and restaurant industries are the most popular hourly job. Of course, employers in this industry must navigate additional payroll, timekeeping and compliance considerations to account for employee tips/gratuities, shifts, and other factors. That’s why it’s essential for restaurants and hospitality industry employers to work with a payroll provider that offers industry-specific support and a comprehensive payroll solution for restaurants.
Overtime Pay for Hourly Employees
Among hourly employees, legal overtime pay (compliant with Department of Labor standards) is time and a half. Using our earlier example, an employee typically earning $15 per hour would earn $22.50 per hour during overtime hours. Remember that any company is entitled to increase its overtime pay rate as long as it remains in alignment with any applicable local, state, or federal employment regulations. Some employers, for instance, offer double pay for holiday work or at certain times of year based on their industry or peak season(s) of business.
Overtime Rules for Hourly Employees
Based on provisions in the Fair Labor Standards Act (FLSA), non-exempt employees must receive overtime pay of no less than time and a half their normal pay rate for any work completed beyond the standard 40-hour workweek. Certain employees (exempt, salaried, or highly compensated) may be ineligible for overtime pay depending on their overall weekly or yearly compensation, job duties, and other factors. We’ll discuss the distinctions between exempt vs. non-exempt employees in a later section.
Regardless, much like minimum wage requirements, overtime rules vary state by state. In states like California, Colorado, Nevada, and elsewhere – where unique overtime regulations have been established – employees should be paid the higher overtime rate, whether state or federal.
Pros of Being an Hourly Employee
Among the more tangible perks, hourly employees can often capitalize on overtime pay to earn more than they would be working the same number of hours on a salaried basis. They are also eligible to pursue a second job to add to their overall compensation. Hourly employees also enjoy greater flexibility that allows them to more easily separate “work time” and family or recreational time.
Cons of Being an Hourly Employee
Hourly employees are often more vulnerable to (and concretely impacted by) economic changes that affect a business – sometimes falling victim to reduced hours or job termination. Hourly employees also have to contend with and plan properly for fluctuations in weekly pay, accounting for inconsistent pay patterns as they budget each month.
Lastly, although businesses with 50 or more employees must provide healthcare to full-time employees, businesses sometimes keep employees’ weekly hours at 29 or 29.5 hours to avoid the 30-hour threshold that mandates employer-sponsored healthcare coverage.
Generally speaking, non-exempt employees receive either hourly pay or a salary that is less than the minimum amount required for exempt status, according to the Department of Labor. If an employee earns less than $35,568 per year or $684 per week and meets other non-exempt criteria, they are considered a non-exempt employee. Non-exempt employees are entitled to minimum wage and overtime pay (in both cases, the highest available in their jurisdiction).
Salaried non-exempt employees receive their normal salary regardless of the number of hours they’ve worked within a given pay period. For instance, if a salaried non-exempt employee works 32 hours in a particular workweek, they still receive their full/established salary amount. Of course, if an employee works more than 40 hours within that same pay period, they are eligible for overtime compensation for any work completed past 40 hours.
In contrast, any employee who earns salaried compensation equal to or greater than $35,568 yearly or $684 per week and also works in an executive, professional, administrative, outside sales, or IT capacity (in some cases), may be considered an exempt employee. Lastly, employees who earn more than $107,432 annually are considered highly compensated and ineligible for overtime pay. Some hourly employees may also be exempt from overtime pay in certain industries. Although exempt employees are ineligible for overtime pay for extra hours worked, they can be rewarded for their work through bonuses, flat sums, or additional PTO.
What is a Salaried Employee?
A salaried employee is paid based on a predetermined yearly amount, which is distributed over a number of pay periods. For example, a salaried employee with a yearly gross salary of $58,000 who is paid using monthly pay periods will receive approximately $4,833.33 each month, and the amount will remain consistent with each paycheck unless the employee receives a raise. In some instances, a salaried employee will be required to use a timekeeping system, but their pay will not be adjusted based on time card entries.
Salaried employees enjoy consistent and fixed compensation, but sometimes have more difficulty separating work and personal time. They do often benefit from employee-sponsored healthcare, PTO, and other perks and benefits, and a greater sense of job security when compared to hourly employees.
Example of a Salaried Employee
Salaried employees receive consistent and pre-established compensation using the pay frequency established by their employer (bimonthly being the most popular). Salaried positions exist in a wide range of professions and industries, but can include those in education (teachers, professors, librarians), the finance industry (financial analysts, accountants), as well as lawyers, pharmacists, engineers, and more.
Frequently Asked Questions
How Does Being an Hourly Employee Work?
Hourly employees receive pay for the exact amount of time that they work and based on a predetermined hourly rate. They are eligible for minimum wage and overtime pay for any work completed beyond the 40-hour workweek. An hourly employee’s hours are likely to vary based on their weekly schedule, shift rotations, or changes to scheduling patterns for all hourly employees.
How much overtime pay do hourly employees receive?
According to federal FLSA requirements, covered non-exempt hourly employees must be paid time and a half for each hour of work beyond their standard 40-hour workweek. If a worker receives $10 per hour, they must earn $15 per hour in overtime pay – sometimes more if state overtime law mandates it, or if employer policy establishes a higher overtime pay rate (2x the normal rate for holiday hours, for example).
What are non-exempt employees?
A non-exempt employee usually works on an hourly basis and earns less than $35,568 annually or $684 weekly. Non-exempt employees are entitled to receive minimum wage and overtime pay, which can vary based on the jurisdiction where a business operates, but can never be lower than federal standards.
What are the pros and cons of being an hourly employee?
Hourly employees can leverage overtime pay to earn more than they would for completing the same scope of work as a salaried employee. Although they enjoy greater flexibility, hourly employees do not receive the same predictable and consistent payment amounts as salaried employees, and often earn less in total annual compensation. They also usually receive less in employee-sponsored benefits and vacation time.
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