Salary vs. Hourly Pay: An Overview
Compensation for work comes in different forms. Two of the most common types of compensation are salaries and hourly pay. A salary is a specific amount of compensation regardless of the number of hours worked. Employees who are paid a salary are not eligible for overtime pay. Hourly pay is the rate paid per hour of work. Employees who are paid by the hour are eligible for overtime pay equal to their base wage plus 50%.
An employee generally has to earn at least $684 per week or $35,568 per year, be paid on a salary basis, and perform exempt duties that require discretion and independent judgment at least 50% of the time to be considered exempt. You’re probably exempt if you take on managerial duties. You can be paid a salary so your employer doesn’t have to pay you overtime wages no matter how many hours you work.
Key Takeaways
- Salaried employees receive a fixed wage and may work extra hours without additional compensation.
- Hourly employees must be paid time and a half for any hours worked over 40 worked during a week.
- The Fair Labor Standards Act determines whether U.S. employees can be paid a salary or must be paid hourly.
- Exempt employees are not entitled to overtime.
Salary
A salary is a fixed wage, usually cited as a monthly or annual salary. This means that your paycheck is for the same amount each time it arrives when you earn a salary. An annual wage is a term of your employment and it's how much you'll receive for as long as you hold the same job or until the terms are renegotiated. It's a type of implicit cost for your employer.
Salaried employees receive a fixed rate of pay but there can be a downside to this type of compensation. If you receive a salary, you have specific goals, responsibilities, and/or tasks that must be met or completed even if that means longer hours and working weekends without any additional compensation.
Working additional hours (without extra pay) may make it more difficult to separate work and personal time and achieve a work/life balance. And it can mean added stress and pressure to complete your tasks even if that means sacrificing your own time.
A salary comes with an inherent sense of security. Employers can cut the hours of a nonexempt worker easily but renegotiating a salary is more complicated.
Hourly Pay
If you're an hourly employee, you're paid for all the hours you work. Your employer must pay you more if they want more of your time. Legal overtime is time and a half and some employers may pay double time for holidays. Overtime hours and pay are normally part of an employment contract. But keep in mind that allowing overtime is at the discretion of the employer.
Working hourly means you could bring home more than if you earned the same official pay on a salaried basis if you’re in a well-compensated field with lots of available overtime. There’s also an effect on lifestyle. Hourly employees can find it easier to separate home and work. They can concentrate on family, hobbies, or a second job when their work is over for the day.
But being paid hourly also makes you more vulnerable. Hourly employees often feel the impact first when laws change or their company goes through tough times. It’s easier for an employer to knock off some of your hours until business improves than it is to eliminate an entire salaried position. Hourly employees protected by a union may be protected against some of these risks, however.
There also are possible effects on eligibility for healthcare coverage. The Affordable Care Act (ACA) requires businesses with 50 or more employees to provide healthcare to full-time employees, who are defined as people working 30 or more hours. Some businesses keep hourly employees to fewer than 30 hours to avoid this mandate.
The Fair Labor Standards Act (FLSA) governs which type of payment an employee receives. You can’t negotiate whether your job is exempt or nonexempt because of the terms of the FLSA. The duties you perform determine your job category regardless of your job title.
| Salary vs. Hourly: Key Differences | |
|---|---|
| Salary | Hourly |
| Guaranteed weekly wage | Pay varies based on the hours you work |
| No overtime pay | Overtime pay at the rate of time and a half for each hour worked over 40 hours |
| Employer-sponsored benefits, such as healthcare coverage, paid vacation, and sick days | May be responsible for their own health insurance and they're not paid except when working |
| Harder to separate work from personal time | Can leave work behind when not on the job |
| Salary comes with a sense of job security | Employers can more easily cut your hours if they choose to |
What Is an Implicit Cost?
An implicit cost is money that a company or firm spends on resources that it already has in place. It's more or less a voluntary expenditure. Salaries and wages paid to employees are considered to be implicit because business owners can elect to perform the labor themselves rather than pay others to do so.
How Much Does the Average American Worker Earn?
The Bureau of Labor Statistics (BLS) indicates that American workers earned a median income of $1,118 per week in the third quarter of 2023. This includes both wage earners and salaried employees. The figure dropped to $1,005 for women. It increased to $1,208 for men. Half of all workers earned more than this median and half earned less.
How Many Americans Have No Earned Income at All?
The national unemployment rate was 3.7% as of November 2023. The rate was less than this in 19 states, however.
The Bottom Line
There are both pros and cons to being an hourly versus a salaried employee. But salaried employees enjoy more benefits for the most part, such as paid vacation and sick days, retirement accounts, and other employer-sponsored benefits. Hourly workers don't usually receive compensation in the form of paid leave by the companies who hire them and they may be responsible for their own healthcare. But hourly employees enjoy more autonomy and may even be able to set their own hours.
