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At the bottom of each job advertisement, companies label a role as salaried or hourly. Both methods will get you paid (yay), but each in very different ways. So, it’s essential to figure out how does salary pay work? While employees paid by the hour are paid based on how long they work, employers pay salaried employees a fixed amount.
Read on to learn the differences between the payment methods and the pros and cons of each.
What Is a Salaried Employee?
The first step in answering how does salary pay work starts with identifying a salaried employee.
If you usually request your paystubs, then take some time to review them. As a salaried employee, the most significant thing you’ll notice is that the money you make is not tied to the number of hours you’ve worked. Instead, your annual salary dictates that you will get a set amount of money on a weekly, biweekly, or monthly basis.
This means that you won’t get paid overtime if you work more than 40 hours, but you will receive full pay if you work less than 40 hours a week. (Many modern-day employers allow employees to take an hour or two here and there for personal reasons without penalty).
How Does Salary Pay Work?
As a salaried employee, you earn a set annual rate broken up into regular paychecks. For example, your employer might decide to pay you weekly, bi-weekly, or monthly. You may have also negotiated other benefits, such as paid leave or healthcare, in addition to your salary.
Salaried employees are considered “exempt,” meaning they don’t qualify for overtime or minimum wage per the Fair Labor Standards Act. Federal guidelines state that exempt (salaried) employees must earn at least $684 per week ($35,568 per year) and perform particular duties defined by the FLSA.
Check with your state’s department of labor for the current overtime provisions in your area, as some states have pledged higher and more generous overtime thresholds for salaried workers. In those areas, the higher state law would override the federal law.
What is Included in a Salary?
During an interview, hiring managers might mention annual compensation alongside annual salary discussions. This is because salaried employers often have other benefits and financial rewards in addition to their salary amount paid in exchange for their work.
Most commonly, these extra benefits include:
- Annual bonuses or commissions
- Insurance (health, dental, life, disability)
- Paid vacations
- Retirement plans
- Profit-sharing plans
- Sick and family leave
- Tuition or child care assistance
- Gym or other app memberships
- Office equipment stipends
How Does Hourly Pay Work?
The difference in answering how does salary pay work vs how does hourly pay work hinges on whether the payment is fixed or flexible. While salary pay is fixed, hourly pay means you get paid for every hour worked. For example, if you work 20 hours at an hourly rate of $18, you’ll earn $360 ($20 x 18 hours).
Hourly employees are also eligible for overtime. Legally, overtime is calculated as time and a half pay, but some employers may pay double time for holidays.
What Do Exempt and Non-Exempt Employees Mean?
Salaried and hourly employees are also labeled as exempt or non-exempt. Typically, you’re considered an exempt employee if you get paid a salary. An exempt employee does not qualify for overtime or minimum wage per the Fair Labor Standards Act.
If you work a non-exempt job, you must be paid a minimum wage of at least $7.25, though these figures vary by state. Non-exempt employees are eligible for overtime pay for any work performed beyond 40 hours per week, at least 1.5 times your regular wage.
Difference Between Salary and Hourly Pay
There are key differences between hourly and salary pay, including how employers classify the job, how they pay you, and what additional benefits they provide. When considering salaried vs. hourly positions, consider these factors.
|Salary Pay||Hourly Pay|
|Does not require tracking exact hours||Must track hours in a timesheet for accurate pay|
|Receives a fixed amount of money no matter how many hours worked, not including overtime pay||Paid per each hour worked, including overtime pay|
|Guaranteed weekly, bi-weekly, or monthly wage||Pay varies based on hours worked|
|Usually qualifies for exempt status||Usually qualifies for non-exempt status|
|Access to employer-sponsored benefits such as healthcare coverage and paid time off||May be responsible for health insurance; Not compensated for “off” days|
|Regular wages offer a sense of security||Hours worked are at the discretion of the employer|
|Some employees find it harder to disconnect from work||Easier to achieve work-life balance because work expectations stop after clocking out|
Advantages vs Disadvantages of Salaried Work
The Advantages of Working a Salaried Job
Many people prefer salaried jobs because of their predictable pay and benefits, among other things.
- Guaranteed wages: Employers follow a payment schedule, so you’ll know exactly when your next paycheck is coming. Many employees set up direct deposits with their bank on a consistent weekly, bi-weekly, or monthly frequency.
- Does not require tracking exact hours: Due to its exempt status, you’ll receive a fixed amount of money no matter how many hours you work in the role. You won’t have to bother with timesheets or clocks.
- Commonly includes additional annual compensation: Most salaried employees will have access to a more comprehensive compensation package in addition to pay, such as employer-sponsored benefits like healthcare coverage and a good PTO policy. These additional benefits are a huge money-saver, and many companies are padding their total compensation package to attract more workers.
- Regular wages offer a sense of security: Guaranteed wages allow you to budget, plan, and save more efficiently because you can expect the same amount of money each paycheck. Your pay won’t change even if work is slow or you log off to take your dog to the vet.
- More opportunities for advancement: Right or wrong, we associate promotions and a raise at work with salaried workers more often than hourly employees. We’re not sure why this is, but some suggest it’s because the skills utilized by salaried employees are often more expansive and complex, which leads to higher earning potential.
- Does not include overtime or holiday pay: Hourly workers can “pick up shifts” and work more than 40 hours to earn more money, especially on holidays. Some companies even allow workers to double or even triple their pay rate during holidays. On the other hand, if you work more than 40 hours as a salaried employee, you’re likely doing it to finish a project or deliverable on time. Your employer won’t compensate you for the extra hours.
- Harder to achieve work-life balance: Clocking in and out as an hourly employee helps create defined work parameters not awarded to salary employees. Therefore, some might find it harder to disconnect from work. Salaried workers are more likely to work “after hours” and are often expected to do what it takes to meet a deadline without extra compensation.
Can a Company Switch Between Salary & Hourly Pay Structure?
Yes, an hourly employee can become a salaried worker and vice versa. These adjustments commonly occur during team reorganizations or if you receive a promotion.
To transition an hourly employee to salaried, the worker must meet FLSA requirements and state laws for exempt status. The FLSA uses five primary exemption tests to determine job status (after passing the $35,568 salary threshold, of course). The tests differ depending on whether the role is classified as:
- Outside Sales
Making a salaried employee into an hourly employee is less common. Employers must adjust your job description to define time parameters within a 40-hour work week plus overtime opportunities. They’ll also need to determine your new hourly rate.
Remember that the new parameters might be less compensation than your annual salary, depending on how they structure your role, so make sure you understand your wage laws before agreeing to anything.
Many workers appreciate the consistent and reliable nature of salary payments, but the work structure often leads to longer hours and less work-life balance. Get straightforward answers on how you’ll be compensated in your next role, then weigh the pros and cons of each payment type before accepting a job offer.