What is the Difference Between Salaried and Hourly Employees?

 Image by Melissa Ling © The Balance 2019

Employees are categorized both on the type of work they do and the ways in which they get paid. If you don't pay employees correctly, you can run into problems with employees who don't receive the pay they expect and with state and federal employment laws. 

In this article, we'll look at what makes an employee salaried or hourly and how to pay these employees correctly. We will also look at the terms "exempt" and "non-exempt" as they refer to salaried employees. 

What Determines if an Employee is Salaried or Hourly

The distinction between salaried and hourly employees is based on the type of work done by these employees and their status as being exempt or not exempt from overtime.

If an hourly employee works more than 40 hours a week, he or she may be eligible for overtime pay (federal law). State laws also regulate when overtime may be paid and the rate of pay.

An employer is always allowed to pay overtime more generously to hourly employees than required by law.

What is a Salaried Employee?

A salaried employee is paid based on an annual amount, called a salary. This salary is divided between the pay periods (as determined by the company) for the year and based on a 2080-hour year. Some salaried employees are given an employment contract.

The U.S. Department of Labor says that anyone paid a salary must meet the "salary basis" test which states that someone who has a predetermined amount of compensation each pay period that can't have their pay reduced because of variations in the quality or quantity of the employee's work. If the employee is ready, willing and able to work, their pay can't be reduced for times when work isn't available. 

What is an Hourly Employee?

 An hourly employee is paid based on an hourly amount.

Hourly employees don't have a contract and are only paid for hours worked. The employer determines the hours for an hourly employee each week. Hourly employees must document their work by using a time card system or completing a timesheet, which the employer verifies. The timekeeping method you use must be complete and accurate. 

There is no federal requirement that an hourly employee must be given a specific number of hours of work a week. Employees who work less than full-time are considered part-time, and they may have different pay rates, benefits, and paid time off than full-time hourly employees.

Salaried Employees vs. Exempt Employees

Being paid a salary usually, but not always, means an employee is "exempt." If an employee is exempt, you don't have to pay them overtime, but there are some specific requirements for considering an employee as exempt.

Federal law has two specific requirements for paying employees:

  • All employees must be paid at least the federal minimum wage,
  • Employees must be paid for overtime at the federal minimum rate of 1 1/2 times their hourly pay for all hours worked over 40 hours in a workweek.

But federal law allows employers to consider some employees as being exempt from both minimum wage and overtime pay based on their job descriptions: executives, administrators, professionals, and outside salespeople. Most exempt employees are paid a salary, but some made be paid on a fee basis, and there is also an exemption for highly compensated individuals paid over $107,432 (effective January 1, 2020; $100,000 before 2020) .

Employees are designated as exempt on a case-by-case basis, based on their job description. This DOL Fact Sheet includes details on exempt status requirements for each type of exempt employee.

When You Must Pay Overtime for Exempt Employees

You may need to pay overtime to some salaried employees if their pay falls below a federal minimum amount. This amount is $684 per week (equivalent to $35,568 for a full-year worker). This pay level is effective beginning January 1, 2020. (The pre-2020 amount was $455 a week.) You may be able to use bonuses and commissions up to $10,000 to meet this requirement.

Just to be clear, if you pay a salaried employee less than $684 a week or $34,468 a year, this person must receive overtime pay at the federal minimum rate of 1 1/2 times the hourly rate for all hours worked more than 40 in a workweek.

How to Calculate Pay for Salaried and Hourly Employees

Since salaried employees are paid annually, and hourly employees are paid by the hour, their pay calculations are very different. 

Example: A salaried employee is paid $20,000 a year. This salary is divided by the number of pay periods in the year, as set by your company, to determine the salary for each pay period. If salaried employees are paid monthly, this employee would receive $1666.67 a month ($20,000 divided by 12).

Example: An hourly employee is paid $9.62 an hour. To find this employee's payment amount, the hourly rate is multiplied by the number of hours worked in a pay period.

For calculation purposes, a salaried employee is determined to work 2080 hours a year (52 weeks times 40 hours a week). So, in the examples above, the $9.62 an hour paid to the hourly worker is roughly the same as the $20,000 annual salary paid to the salaried worker.

What If You Don't Pay Salaried and Hourly Employees Correctly

Your company is required to pay employees the correct amount of money for each pay. Both federal and state laws set these requirements, including, for example, minimum wage rates. In another example, if you pay an employee a salary when this employee should be paid an hourly rate, you may not be paying overtime as required by federal and state regulations. 

The consequence of not paying employees the correct amount as required by law may result in:

  • Losing the exemption and having the reimburse the employee, and
  • Federal or state lawsuits or lawsuits by employees or having to pay fines and penalties for underpayment. 

Check with your employment attorney to make sure you are paying employees correctly as salaried or hourly and that you are paying overtime correctly. 

Don't Forget About State Employment Laws

Every state has minimum wage laws and overtime laws that may be higher or lower than federal requirements. You must comply with the law that gives the most advantage to the employee. Check this article on state labor laws, including state minimum wage laws for the laws in your state.

A Final Word on Salaried and Hourly Employees

Start out carefully as you start a business by making sure employees you designate as salaried meet all the requirements to be exempt from overtime. That means:

  • Paying them at least the minimum requirement (detailed above), and
  • Making sure their job description fits the other definitions for being exempt.

For hourly employees:

  • Keep careful track of their hours,
  • Make sure they are paid at least minimum wage (federal or state, whichever is higher), and
  • Make sure you pay them overtime at least at a minimum of 1 1/2 times over 40 hours in a week. 

Article Sources

  1. U.S. Department of Labor. "Fact Sheet #17G: Salary Basis Requirement and the Part 541 Exemptions Under the Fair Labor Standards Act (FLSA)." Accessed Nov. 11, 2019.

  2. U. S. Department of Labor. "Fact Sheet #21: Recordkeeping Requirements under the Fair Labor Standards Act (FLSA)." Accessed Nov. 11, 2019.

  3. U.S. Department of Labor. "Final Rule: Overtime Update." Accessed Nov. 11, 2019.

  4. U. S. Department of Labor. "Wage and Hour Division. FLSA2001-3. (letter)." Accessed Nov. 11, 2019.

  5. U.S. Department of Labor. "Fact Sheet #70: Frequently Asked Questions Regarding Furloughs and Other Reductions in Pay and Hours Worked Issues." #11. Accessed Nov. 11, 2019.