Salary vs. hourly pay are two ways that businesses classify workers, based on how and when they receive their compensation. There are pros and cons to each, both for employers and employees, as well as numerous rules and laws that can come into play. But it boils down to this: Hourly employees’ compensation is tied to the number of hours they work, including overtime. Salaried employees get a fixed amount.
Table of Contents
Key Points
• Salary and hourly pay are two common ways in which employers compensate workers, with one being fixed and the other tied to hours worked.
• Hourly employees are paid for each hour worked and are typically eligible for overtime pay if they work more than 40 hours in a week.
• Salaried employees receive a fixed amount of pay during a set period, regardless of the number of hours they work.
• Some salaried employees are classified as exempt from overtime pay, while nonexempt employees must receive overtime compensation.
• Both salary and hourly pay structures have advantages and drawbacks in terms of income stability, benefits, overtime eligibility, and job flexibility.
What Is An Hourly Rate?
An hourly rate is the set per-hour compensation that a worker earns based on their employment contract. That hourly rate can be any number above the federal wage floor, or the minimum wage, of $7.25 per hour. The lowest that an hourly worker in the U.S. can earn is $2.13 per hour, as set by federal law, for workers who receive at least $30 per month in tips.
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What Is a Salary Rate?
As mentioned, salaried employees earn a fixed amount regardless of how many hours they work. As such, a salary rate is what an employee would earn over a fixed amount of time, such as a traditional 40-hour workweek. Since we typically refer to annual salaries, if, for example, job X pays a salary of $100,000 per year, a salary rate could be $1,923.08 per week (a $100,000 annual salary divided by 52 weeks).
The big difference when it comes to exempt salaried workers is that they are generally not eligible for overtime pay if they work beyond the predetermined number of hours (usually 40) set by their employer and applicable laws.
If you want to find out what a good entry-level salary is, you can do some research on averages in your industry and geographic area to get an idea.
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Why Are Some Jobs Hourly and Others Salary?
Federal laws and regulations determine whether some jobs can be exempt from overtime pay rules. This rule helps ensure that more workers are compensated with overtime pay if they work more than the standard 40 hours in a week.
Depending on the state you live in, there may be additional wage and overtime rules that affect how employees are paid.
The Big Difference Between Salary vs Hourly Pay
Overtime pay can be a key differentiator between a salaried and an hourly employee. Overtime pay is given at 1.5 times the rate of the normal hourly rate, commonly referred to as “time and a half.”
A related concept is “exempt” vs. “nonexempt,” where exempt means exempt from overtime wages. Nonexempt employees, on the other hand, receive overtime wages for working more than 40 hours per week.
In certain situations, an employer may end up paying a salaried employee overtime, but it depends on the specific agreement or contract between the two parties.
Additionally, salaried jobs tend to be more administrative, professional, or white collar and may offer more or better fringe benefits than hourly jobs. That’s not always the case, but if you are climbing the corporate ladder and become a salaried employee, you may notice that your compensation package is more comprehensive than the packages of hourly workers.
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Salary Pay
As noted above, many salaried employees earn a fixed amount regardless of how long they work. There are some obvious pros and cons to salaried positions.
Pros of Salary Pay
One advantage of many salaried positions is that an employee will earn the same amount of money during a given time period regardless of how much they work. So, if they only work 30 hours in one week, they still receive the same amount of pay as they would have if they worked 40 hours.
Salaried jobs often offer better benefits, such as employer-sponsored health insurance and paid vacation days. Salaried jobs may also be more secure than hourly positions and offer workers more opportunities for advancement.
Cons of Salary Pay
Salary pay can be a double-edged sword: While you’ll be paid for 40 hours even if you work only 30, the same applies if you work 50 hours. Some salaried positions may not offer overtime pay if you work more than a standard workweek. That can be a big drawback for some workers.
Similarly, depending on the specifics of the position, it may be harder to keep your personal and professional life separate. Salaried positions may provide more benefits and job security, but that comes at a cost of more demanding work that may encroach on your personal time.
Hourly Pay
Hourly workers earn their paycheck by the hour, which, like salaried positions, also has its pros and cons.
Pros of Hourly Pay
A key advantage of many hourly jobs is that workers are eligible to earn overtime pay, although some employers may try to avoid this by ensuring hourly workers do not work overtime. It may also mean that you’re not working 50 or 60 hours a week like most salaried employees do.
Hourly workers may earn higher pay on certain days, such as holidays, depending on their employer’s policies. In some industries, working overtime may be standard or expected, which may help boost an hourly worker’s earnings above those of salaried workers in some circumstances.
Cons of Hourly Pay
A big disadvantage to hourly-paying jobs is that they can be less secure than salaried positions. Turnover can be high, for example, and if the economy takes a turn for the worse, hourly workers may have reduced hours, or their positions may be furloughed or eliminated. Further, hourly jobs aren’t usually very flexible and may not offer workers paid time off or sick days to workers, for example.
The Takeaway
Salaried workers receive a fixed paycheck regardless of the number of hours they work, whereas hourly workers receive wages based on the number of hours they clock. A key difference between the two is that some salaried workers are exempt from overtime pay, which is 50% more than their standard hourly rate. Each type of employment has its pros and cons, but, in some cases, salaried positions may offer greater job stability.
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FAQ
Is it better to be paid a salary or an hourly rate?
Salaried positions are often considered more prestigious and can offer more job security and benefits. Many workers feel it’s better to be paid a salary because it’s more predictable, but it ultimately depends on the position and the employee’s personal preferences.
What is the advantage of salary pay?
One advantage of many salaried positions is that you have a fixed paycheck coming your way during a given time period. Of course, that can also be a disadvantage if you regularly work more than 40 hours per week. It may also be easier to budget with a fixed, salaried income.
What are the budget challenges of being a salaried employee?
Salaried employees are, in a sense, on a fixed income; they’re earning the same amount throughout the year and may not be able to increase their pay by working overtime, depending on their classification. If they don’t receive a raise annually, they may see their effective pay decline due to inflation, which can end up straining their budgets.
Do salaried employees ever receive overtime pay?
Some salaried employees may still be eligible for overtime pay, depending on their job classification under federal and state labor laws. Workers who are classified as nonexempt must be paid overtime if they work more than 40 hours in a week. Exempt employees, however, generally do not receive overtime pay.
Can hourly workers earn more than salaried employees?
Yes, in some situations, hourly workers may earn more than salaried employees. If an hourly worker regularly works overtime or receives additional pay for working holidays or extra shifts, their total earnings could exceed a fixed salary. However, their earnings will depend on the specific job, industry, and number of hours worked.
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