If you’re a small business owner and are unsure as to whether to pay your employees annually, with a salary, or hourly with payment only for the hours they work, you might find it helpful to ask yourself the following questions:
What work will my employees be carrying out?
When it comes to deciding between the two different types of pay, the most important factor is whether the employee is exempt or nonexempt. For workers classified as nonexempt under the Fair Labor Standards Act (or FLSA), payment must be given on an hourly basis. That said, if consistent work isn’t available for a salaried employee, you may wish to pay them hourly, instead. For employees who will be working for more than 40 hours a week on a regular basis, salaries tend to be more cost-efficient.
Do I need to consider any state laws that might be relevant?
In some instances, an employee who is classed as exempt on a federal level, may still be classed as nonexempt by certain state laws. With this in mind, it’s important to ensure that you’re familiar with any laws that might be relevant to the classification and paying of employees, and working with an outsourced payroll and HR provider can ensure that you’re always compliant, and always paying your workers fairly and legally.
What’s trending at the moment in the job market?
According to statistics, more than 50% of the workforce in the U.S. is paid hourly and not by salary, with this figure fluctuating a little in recent years, particularly in the wake of the COVID-19 pandemic. With many of the thousands of companies that were forced to close their doors, paying their employees on an hourly basis, this caused the number of hourly paid workers to decline.
While payment trends shouldn’t be the only thing you base your decision upon, it can be helpful to keep them in mind.
Should benefits be included in my employees compensation package?
There is no reason why benefits can’t be offered to employees paid by the hour, but when it comes to salaried employees, benefits are much easier to keep track of. While this need not be a deciding factor when choosing how to pay your employees, it can be taken into consideration.
Ultimately, how you choose to pay your employees is entirely up to you, and provided you abide by all relevant laws at both state and federal level, you can make a decision that is based upon the best interests of your company. You may, however, find it useful to talk the two options over with a payroll professional, who will outline the pros and cons clearly for you, and help you come to the right decision for your business, and your employees.