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Salary versus Hourly-Which Way Is Best?

Questions about whether it is better to pay employees hourly versus a salary are quite common. There are pros and cons to both approaches, as well as advocates on both sides of the fence. Some consultants recommend paying staff on an hourly basis, while other industry consultants advocate for staff to be paid a salary.

Who is right? Well, that depends upon your specific circumstances. There is no one right method for compensating employees so long as the rules, when applicable, are followed. Each employer should determine this based on his/her own business needs and management philosophy. Regardless of which way you choose to compensate your employees, it is important to make sure that you adhere to applicable wage and hour requirements.

Before discussing the relative pros and cons of each method, let’s define some terms that are important in understanding the issues.

Hourly Compensation
This is as straightforward as it gets. This method simply pays employees for each hour, or portion thereof, worked. This is easy to understand and administer.

Salary Compensation
Payment on a salary basis means that an employee receives a predetermined amount of compensation on a regular basis, such as weekly, bi-weekly, or monthly. This is usually regardless of the number of hours worked by the employee each week, or each pay period.

Employee Classifications
Under the Fair Labor Standards Act (FLSA), employees fall into one of two categories: exempt or non-exempt. Methods of compensation, such as salary or hourly, do not determine a legal classification of employee.

Exempt Classification
Exempt employees do not receive overtime pay; they are exempt from the overtime pay requirements and calculations. Don’t you wish you could arbitrarily make every employee exempt? Not possible. This classification applies to executive, managerial, supervisory, administrative positions, or governmentally-defined professional positions that typically require special licensure. To qualify, there are specific rules regarding the amount of time spent managing/supervising/administrating, the numbers of people managed/supervised/administered, and the type of managerial/supervisory/administrative duties and authority that must be met. Most employees do not qualify for the exempt classification because of the strict rules.

Non-Exempt Classification
Non-exempt employees receive overtime pay at all times, when it is worked, regardless of their method of compensation; they are not exempt from the overtime pay requirements and calculations. This classification applies, by default, to any and all employees who do not meet the guidelines or definition of exempt, as outlined by the FLSA and/or state laws and thus applies to almost all employees.

Note: All of the FLSA’s requirements for exempt status are extensive, specific, and stringent and cannot be covered here in detail. Suffice to say that at least 95 percent of all dental staff is non-exempt. For specific questions about the criteria or one of your employees, call our office. 

Overtime Triggers
On a federal level, the overtime trigger is 40 hours in a week. Anything over 40 hours in a week must be compensated at time and one half. Some states, like California, have daily overtime triggers in addition to the federal weekly requirement. Be sure you are in compliance with both, if applicable.

Many employers fall prey to the myth that: “if I pay someone a salary, then I don’t have to pay them overtime.” This couldn’t be more false. The method of compensation has no bearing on overtime requirements. Simply paying an employee a salary does not exclude you from having to pay him/her overtime. “Salaried” is not a category for overtime purposes.

The determining factor for overtime is employee classification as mentioned above. Exempt employees are excluded from having to be paid overtime. While non-exempt employees, regardless of the method of compensation, must be paid overtime.

Exempt Employees
An important detail for exempt employees is that they generally must receive their compensation in the form of salary. There are provisions that dictate what the minimum salary must be, which may be significantly increasing in the coming months. Generally, exempt employees must be paid for the full day even if they’ve only worked part of a day. Full day deductions are strictly limited with rules that must be followed before doing so.

Non-Exempt Employees
There is no rule that says non-exempt employees have to be paid a certain way. They can be paid a salary whether that’s a daily, weekly, or monthly. They can also receive their compensation in the form of a daily rate, an hourly wage, piece rate, or commission. So long as you are paying a non-exempt employee at least minimum wage, you may compensate them at a rate and method of your choosing. Non-exempt employees must only be paid for time actually worked. This means that when employees are late, have to leave early, or take time off during the day, whether that’s a half or a full day, they are not required to be paid.

Unlike exempt employees who all have to be paid the same based on their classification, non-exempt employees need not all be compensated in the same manner. You can have some employees be paid hourly, some daily, and some a salary depending on what you think will be best for your practice.

While exempt employees are protected from a variety of salary reductions for work not performed, non-exempt employees are not. If a salaried, non-exempt employee fails to work the full schedule required, then his/her salary can be reduced by the appropriate number of non-work hours. Be sure you have clearly established policies, in writing, explaining that you will avail yourself of this right to avoid confusion and arguments.

So…Salary or Hourly?
As you can see, this question truly only applies to non-exempt employees. For this classification of employee, we do recommend hourly pay because it is simple, straightforward, easy to understand and administer.

On the other hand, paying a non-exempt employee a salary often does have a psychological value for the employee. And, it can be administratively easy if overtime isn’t worked or time-off deductions don’t exist.

If you decide to pay your non-exempt employees a salary, be clear how many hours per week the salary is based upon. It can be any number up to 40 hours. As mentioned, you can dock the employees pay. Make clear how you’re going to handle this when the employee works less than the defined schedule. In other words, what will you do if you define the salary as 34 hours per week and the employee only works 28 unexpectedly? Similarly, if the employee works more than the defined schedule, you must increase their pay. In other words, a salary based on 34 hours must be increased if the employee works 38 hours. And don’t forget that any hours over applicable daily and/or weekly overtime triggers must be paid at time and one half. All of which you should have in writing to ensure everyone is on the same page.

As you can see, there are many misconceptions and misunderstandings about paying employees on a salary basis, especially as it relates to non-exempt employees and overtime. It is not as simple as “just pay everyone a salary.” In fact, when you get right down to it, the cons can outweigh the pros depending on your circumstances. Be sure you know the rules: 1) classify your employees correctly, 2) follow wage, hour and overtime requirements, and 3) have any and all exceptions clearly defined in writing to avoid liability and misunderstandings.